A Socially Awkward ETF?

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I originally suspected that the Global X Social Media ETF (NasdaqGM:SOCLF.PK - News) was more of a marketing ploy than anything else, based on the fact that few social media companies are even public.

Facebook is private, as is Zynga, as is Twitter. With these powerhouse firms out of the picture, how could SOCL masquerade as a social media fund without inspiring anything but laughter?

The answer after looking under the hood is, as always, complicated.

First the basics. SOCL tracks a market-cap-weighted index of 25 firms and charges 65 basis points in annual fees.

The holdings have a remarkable international tilt, with fully 74 percent of companies devoted to international securities. This is largely dominated by China and Japan, which make up 37 percent and 20 percent of the portfolio, respectively.

And that’s the rub. U.S. social media companies that dominate the domestic landscape are nowhere to be found, and when they are, they have meager weightings. This is neither Global X’s fault nor that of the fund’s index provider, Solactive. As I said, the prominent social media companies are still private.

Moreover, the social media companies that have gone public have done so with such low float figures that it makes including them in an index very challenging. Take LinkedIn, for example. It floated only 8.3 percent of its shares in June, and Groupon floated just 4.7 percent.

A Mostly Asian Fund—For Now

But am I reading too much into the lack of domestic social media exposure the fund provides?

After all, there’s a whole world of people out there “socializing” electronically via portals many of us are either unaware of or indifferent to.

Just consider some of the more interesting companies in the top 10 holdings:

  • Tencent Holdings Inc. is a Chinese provider of Internet access and mobile services, which includes China’s largest instant messaging service.
  • Sina Corp., or Sina.com, makes up over half of the Chinese microblogging market, pulling in 140 million users every day. Think of it as a hybrid of Facebook and Twitter, but focused on China.
  • Dena Co. Ltd. runs Mobage, a popular gaming platform for cell phones in Japan. In 2010, it bought the company ngmoco, one of the first successful developers and publishers of iPhone games.
  • NetEase is a giant Chinese Internet firm, responsible for Web portal 163.com and massive multiplayer games. According to Alexa’s Internet rankings, 163.com is the 28 th -most-visited site in the world.
  • Gree is a popular social networking service out of Japan for computer and mobile phone users.

 

All of those companies are distinct social media companies operating a world away from our U.S.-centric bubble, servicing users in economies both developed and emerging.

So, notwithstanding the fact that companies such as Facebook and Zynga aren’t publicly traded, plenty of social media companies the world over are doing big things.

In many ways, even if the domestic companies whose services we spend so much time using were to be publicly traded, SOCL would still be a very global, very Asian portfolio.

So, while the portfolio does offer interesting exposure, the next logical question is:Does it provide radically different exposure than existing global technology funds?

Because SOCL has been trading for just over 24 hours, we can only compare some of the more prominent holdings to the performance of the only globally diversified technology fund, the iShares MSCI ACWI ex-US Information Technology ETF (NYSEArca:AXIT - News).

 

 


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Social media cos. vs. AXIT

As you can see, while AXIT — the red line at the bottom of the chart — meandered along in a rather consistent pattern, the top five holdings of SOCL exhibited much more volatility, with the majority of them seeing significant gains over the past year.

This is due largely to the fact that any overlap between SOCL and AXIT, like Tencent, is overshadowed by AXIT’s more substantial weightings in large-cap technology firms like Nintendo, NEC and Fujitsu.

The takeaway? It does appear that SOCL may in fact provide unique exposure after all.

The only reason I hedge that statement is because we have no way of knowing how the social media landscape will develop over the coming months and years. Google, one of the fund’s top 10 holdings, has been aggressive in pursuing a social media mandate, and yet its identity as a tech company is still firmly entrenched in investor psyches. Time will tell if it succeeds in expanding the public’s perception.

In addition, the eventual IPOs of Twitter, Facebook and Zynga feel like mere formalities at this point, meaning the fund could eventually look very different than it does now.

Equipped For Changes

Cleverly, SOCL builds such inevitable changes right into its very structure.

The index provider has made it clear that an IPO of any of these companies represents an extraordinary market event that will allow for a special rebalancing, outside of the otherwise prescribed twice-a-year rebalancings.

One additional caveat that SOCL investors need to be aware of is the risks of investing in international companies.

Global exposure can be a great thing, but in the context of a diversified portfolio of stocks, too much of a good thing can increase risk. As such, make sure the international weighting of the fund fits your profile and objectives.

To bring this discussion full circle, it seems my discounting of SOCL’s potential was misguided and perhaps symptomatic of my U.S.-centric view.

This fund offers exposure to a powerful, specific trend in a global manner.

In other words, it’s time for me to eat crow. Just make sure it’s cooked medium rare.

 

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