Social Media ETF Delusions


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Whether or not we’re in a bubble, this time around the rise in technology-related stocks has centered on certain trends in the industry—notably social media and cloud computing—whereas the bubble of 1999-2000 touched any company that had anything to do with the Internet.

It’s no surprise that the ETF industry is taking this opportunity to launch more technology ETFs, and very specific ones, at that. We already have ETFs for cloud computing and smart phones, and a couple of Internet IPO ETNs from UBS that Dennis wrote about in his latest blog. We even saw Global X filing for an ETF for canvassing the still-developing world of social media.

I have nothing against niche funds. As Devin Riley pointed out in his recent blog, niche funds are gathering more and more assets. More choices for investors is a positive. I only wonder about the execution. Is the fund going to provide the exposure that investors are looking for?

Both the First Trust ISE Cloud Computing Index Fund (NasdaqGM:SKYY) and the First Trust Nasdaq CEA Smartphone Index Fund (NasdaqGM:FONE) include large nonpure-play conglomerates. This begs the question:What will the social media ETF look like?

There are plenty of obstacles to creating a social media ETF. The largest comes from the number of companies that are still private. The most sought-after social media firms have yet to go public, including Facebook, Zynga and Twitter. The pure-play firms that are public are, for the most part, small-cap.

Then there’s the problem with outstanding float. LinkedIn ( LNKD ) shares skyrocketed after its initial public offering in May. Part of the reason it shot up was because only 7.84 million shares, or less than 10 percent of total shares outstanding, were being offered.

Similarly, Pandora ( P ) has only 8.8 percent of its shares outstanding currently floating in the market, which makes you wonder what the significance is of the proposed Global X ETF being able to invest in Web-based media applications.

You also have to wonder what percentage of the fund’s holdings will be pure-play companies.



Google (NasdaqGS:GOOG) became a major contender in the market for social media with the launch of Google+. But the majority of its revenue comes from other applications. With a market cap of almost $200 billion, it easily dwarfs the other social media firms. Investing in a fund heavily concentrated in Google wouldn’t give investors the social media exposure they crave.

Google isn’t the only problematic one, though. News Corp (NasdaqGS:NWSA) owns MySpace, which, despite being on the losing end of its social media battle with Facebook, still has over a 100 million registered users.

The good news is Global X’s index provider, Solactive, already has an index for social networking. The Solactive Social Networks Index is designed to track the 15 largest social networking firms. Theoretically, the new index will only need to add file sharing and Web-based media application firms.

Still, the Solactive Social Networks Index suffers from many of the problems I already mentioned. It obviously can’t include Facebook—at least not yet. It also suffers from the outstanding float problem I described.

Companies like, the largest free email-service for Russian-speaking email users, have more than six times the allocation of LinkedIn. This is despite the fact that LinkedIn’s market cap of $9.8 billion is larger than’s market cap of $7.4 billion.

That said, the index doesn’t include Google and News Corp, which is a positive for investors looking for pure-play exposure. It does include companies like United Online, which has its hands in consumer products and NetZero.

But the troubling part is that United Online has almost as high an allocation as LinkedIn, despite having a market cap of only $544 million.

The success of technology IPOs is only going to give private technology companies more incentive to issue shares.

If that ends up happening, the Global X ETF will be able to provide better exposure to the social media industry. The social network index rebalances only twice a year—not frequently enough to gain from the initial jump in IPO prices.

Luckily, Solactive has already said it considers a Facebook IPO to be an extraordinary event worthy of rebalancing the portfolio sooner.

The contents of the underlying index still remain to be seen, which leaves hanging the biggest question of all—how much will firms like Facebook offer investors?


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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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