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ETFs in Focus as Snapchat Files for IPO

The craze for social media stocks like Facebook FB, LinkedIn LNKD and Twitter TWTR is backed by solid earnings growth and a wave of mergers and acquisitions. Though the three firms have a strong foothold, rising stars like Snapchat and Pinterest could give them a body blow (read: Twitter Acquisition Talks in the Air: Stock & ETFs Gain).

This is especially true as Snapchat, which is considered as the fastest-growing and hottest social media network in today’s world, has confidentially filed the paperwork with U.S. regulators as per the reports. Snapchat is looking to go public as early as March and is expected to raise $4 billion through its IPO, which could value it between $25 billion and $35 billion, according to Bloomberg.

The offering would be the second largest in U.S. technology history behind Facebook’s debut in 2012 with a value of $81.2 billion. It will also be the biggest IPO since Chinese e-commerce giant Alibaba BABA went public two years ago with a value of $170.9 billion.

Fast Review of Snapchat

Snapchat, which came into existence in 2012, is a free mobile app with a broad reach among young millennials (born between 1981 and 2000) and Generation Z, the two valuable demographic groups for many businesses. It has 150 million active users globally, the majority of whom are millennials.

As per eMarketer, Snapchat is poised for explosive growth in global ad revenues in the coming years. The company is expected to generate $935.5 million in ad revenues next year, up from the estimated $366.7 million for this year. Additionally, Snapchat revenues could nearly double in 2018 to $1.76 billion. This suggests that the company is primed for solid future growth.

Further, Snapchat seems well positioned compared to its competitors and will thus have an edge over them. This is because Facebook has hit the maximum ad load (the ratio of ads to personal posts), which is now expected to taper in the second half of 2017 and would result in slower ad revenue. In addition, Snapchat is gaining popularity faster than Twitter and LinkedIn (read: Facebook Shares Drop Despite Solid Q3: ETFs to Watch).

How Tech IPO Industry Is Faring?

The year 2016 has been rocky, perhaps even the weakest, for U.S. tech IPOs since the financial crisis. Only about 14 tech firms have gone public in the U.S. so far this year with furious listings in September. In particular, tech unicorn (private company valued over $1 billion) Nutanix NTNX surged 131% on its debut – the biggest first day pop for 2016. Another unicorn – Twilio TWLO – soared more than 90% on its first day of trading. Coupa Software COUP surged over 100% on its opening day.

After a slow 2016, the Snapchat IPO early next year is expected to set the stage for a resurgence in technology listings. The company’s bullish growth prospects will impress investors, leading them to add the stock to their portfolio.

As a result, the following ETFs might be in focus ahead of the IPO and could see busy trading in the coming weeks. Though the following ETFs have not yet disclosed holding Snapchat in their roster, any of these could be worthwhile for investors seeking to take advantage of the filing:

Global X Social Media Index ETF SOCL

This ETF targets the global social media space by tracking the Solactive Social Media Index. Holding 34 securities in its basket, it is heavily concentrated on the top three social media firms – LNKD, TWTR and FB. In terms of country exposure, U.S. firms take more than half of the portfolio, closely followed by China (25%) and Japan (6%). SOCL has so far amassed $107.8 million in its asset base. It charges 0.65% in fees and expenses and sees moderate volumes of roughly 74,000 shares a day.

Similar to Facebook and Twitter, Snapchat is expected to be included in SOCL holdings at the close of the fifth trading session following the IPO. The ETF currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook.

First Trust US IPO Index Fund FPX

This ETF targets the U.S. IPO market and follows the IPOX-100 U.S. Index. It has accumulated $597.4 million in its asset base and charges 60 bps in fees a year. Volume is moderate as it exchanges about 50,000 shares in hand on average. In total, the fund holds 99 securities in its basket with the largest allocation going to The Kraft Heinz Company and AbbVie with over 9% share each. The product has a slight tilt toward information technology firms, followed by healthcare, consumer discretionary and consumer staples (read: How to Play Hot Tech IPOs With ETFs).

Since the ETF focuses on the 100 largest and most liquid U.S. IPOs, new companies can find entry into the fund’s holding after trading for a minimum of 100 days.

Renaissance IPO ETF IPO

This new fund also provides exposure to the largest and most liquid newly listed companies by tracking the Renaissance IPO Index. New companies seek inclusion on a ‘fast entry basis’ on the fifth day of trading.

Currently, Citizens Financial Group takes the top spot at 12.4% closely followed by Alibaba. Here again, technology stocks make up for more than one-fourth share while financials and healthcare round off the top three. The fund holds 57 stocks and has attracted $12.4 million in AUM. It trades in light volume of less than 3,000 shares, probably ensuring additional cost beyond the expense ratio of 0.60%.

Sprott Buzz Social Media Insights ETF BUZ

This newly debuted ETF has accumulated $5.1 million in AUM since April and targets the most talked about stocks on the web across the social media landscape. It holds a well-diversified portfolio of 78 stocks with none holding more than 3.7% of assets. The product is a bit costly, charging 75 bps in annual fees and trades in a paltry volume of about 500 shares (read: How Is Q3 Earnings Season Going for Social Media ETFs?).

The stocks found a position in the fund’s holding based on the filtration of over 50 million unique stock-specific data points from social media comments, news articles and blog posts through analytics model, which utilizes Natural Language Processing Algorithms and Artificial Intelligence Applications. The holdings are adjusted each month.

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FACEBOOK INC-A (FB): Free Stock Analysis Report
LINKEDIN CORP-A (LNKD): Free Stock Analysis Report
ALIBABA GROUP (BABA): Free Stock Analysis Report
TWITTER INC (TWTR): Free Stock Analysis Report
RENAIS-IPO ETF (IPO): ETF Research Reports
GLBL-X SOCL MDA (SOCL): ETF Research Reports
NUTANIX INC-A (NTNX): Free Stock Analysis Report
TWILIO INC-A (TWLO): Free Stock Analysis Report
FT-IPOX 100 (FPX): ETF Research Reports
SPRT-BUZ SOCL M (BUZ): ETF Research Reports
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