Whether or not weâre in a bubble, this time around the rise in
technology-related stocks has centered on certain trends in the
industryânotably social media and cloud computingâwhereas the
bubble of 1999-2000 touched any company that had anything to do
with the Internet.
Itâs 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 thereâs the problem with outstanding float. LinkedIn (
) 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
Similarly, Pandora (
) 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
You also have to wonder what percentage of the fundâs 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 wouldnât give
investors the social media exposure they crave.
Google isnât 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 Xâs 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 canât include
Facebookâat least not yet. It also suffers from the outstanding
float problem I described.
Companies like Mail.ru, 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 LinkedInâs
market cap of $9.8 billion is larger than Mail.ruâs market cap of
That said, the index doesnât 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
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 yearânot 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
The contents of the underlying index still remain to be seen,
which leaves hanging the biggest question of allâhow much will
firms like Facebook offer investors?
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