By Michael Johnston:
Global X became the latest issuer to offer an ETF targeting a segment of the global technology industry this week, rolling out the first ETF to specifically target the social media industry. The new Global X Social Media Index ETF (NasdaqGM:SOCL - News) will seek to replicate the Solactive Social Media Index, a benchmark that includes companies engaged in various aspects of the rapidly-expanding social media industry. Currently, the underlying index consists of about 25 stocks, including firms that provide social networking, file sharing, and other web-based media applications. The portfolio includes some of the firms that have recently completed IPOs, as well as more established companies in the social media space.
It is, of course, no secret that usage of social media has jumped in recent years. A recent survey conducted by the Pew Research Center indicates that about 65% of adult Internet users said they use a social networking site, nearly double the adoption rate reported in 2008. And social media outlets are no longer just for individuals; more than 80% of Fortune 100 companies use branded social media channels, and about one out of three small businesses uses social media in some way.
The relatively low Internet penetration rates in the emerging world create a meaningful opportunity for social media companies; though most of the U.S. population has easy access to sites such as Facebook and Twitter, Internet usage rates in India and China are well below 50%. As greater percentages of these markets comes online, usage of social media sites should experience strong organic growth.
Social media companies have seen their valuations explode in recent years, capturing a growing share of Internet traffic–which has been rising significantly year-over-year. Some social media companies generate revenues primarily from the sale of online advertising space, while others, such as Groupon, maintain more unique revenue models. Many social media companies are still relatively early in their life cycles, with a significant portion of them not yet turning a profit. That makes this sector a risky, but potentially very rewarding play; if these firms are able to grow revenues while achieving sustainable profitability, valuations could skyrocket. If, however, these companies are unable to generate positive cash flows from their core operations, the relatively lofty valuations could deflate in coming years.
“SOCL can provide an efficient way to tap into this global, dynamic sector,” said Bruno del Ama, chief executive officer of Global X Funds. “As the industry continues to expand through IPOs, the index will capture these new companies shortly after their public debut, providing a relatively cost effective way to gain exposure to the social media industry.”
Under The Hood
The new social media ETF includes both U.S. and international companies, maintaining exposure to both developed and emerging economies outside the U.S. The most-recognized names included in the underlying portfolio among U.S. investors are likely to be daily deal site Groupon (NasdaqGS:GRPN - News) and networking site LinkedIn (NYSE:LNKD - News), both of which completed initial public offerings in 2011. SOCL will also maintain a position in online music company Pandora (NYSE:P - News).
Major international components include Chinese social media company Tencent Holdings, Inc. (TCEHY.PK), Chinese micro-blogging site operator Sina Corp. (NasdaqGS:SINA - News), Japanese company Dena Co. (DNACF.PK), and Chinese Internet and online came services provider Netease.com (NasdaqGS:NTES - News); those four names combine to make up about 40% of the total portfolio. Not all of the stocks included in SOCL are “pure play” social media companies; Google (NasdaqGS:GOOG - News) is also included in the portfolio. Although Google has a growing social media presence through its YouTube division and the recently-launched Google+, the bulk of revenues and earnings are derived through search-related services.
From a country perspective, it is China that receives the largest allocation with about 37% of assets. The U.S. comes in second, followed by Japan (19%), Russia (10%), and Germany (2%). Also included in the portfolio are equities from India, Taiwan, Italy, and the United Kingdom.
The new ETF will charge an expense ratio of 0.65%, in line with other targeted technology exchange-traded products.
Targeted Tech ETFs Take Off
The launch of SOCL continues the launch of targeted ETFs within the tech sector; a number of the funds to begin trading in 2011 have offered exposure to narrow segments of the industry. In addition to the Smartphone ETF (NasdaqGM:FONE - News) from First Trust, a number of other hyper-targeted ETPs have popped up in recent months:
Given the relatively young age of the social media space, many of the major players in the industry are not yet publicly-traded. Facebook and Twitter, two of the most widely-used social media sites in the world, have not yet completed IPOs. The number of firms eligible for inclusion in the underlying index could increase significantly in coming months as this corner of the tech space matures; the IPO pipeline is currently filled with a number of highly-anticipated IPOs, including online games maker Zynga, Twitter, and Facebook.
Timings for those offerings is somewhat fluid; it is now expected that Facebook may not go public until late 2012, while Zynga could begin offering its shares after Thanksgiving under the ticker ZNGA. The timing of Twitter’s potential IPO has not been specified yet.
For more on the new social media ETF, see the SOCL fact sheet.
Disclosure: No positions at time of writing.
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