Talk about going out with a bang. The last day of the current trading week is expected to feature what might be the most anticipated IPO in history, with social media giant Facebook finally becoming a public company. Preparations have been underway for the past several weeks, with the Nasdaq even conducting test sessions to ensure it can handle the massive volumes expected in initial trading.
With investors embracing ETFs and indexing strategy in droves, the nuances of index methodologies are a topic of growing interest. High profile IPOs can ultimately lead to meaningful rebalancings–which in turn can trigger multi-billion dollar purchases of target stocks [see also Hitchhiker's Guide To The ETF Galaxy].
The upcoming IPO highlights an interesting element of index-based exchange-traded funds: the waiting time between a public offering and inclusion within these products can vary considerably, and depend on a number of factors. Below, we highlight a few ETFs that will eventually include FB stock–though for some this addition will come much sooner than for others:
Global X Social Media ETF (SOCL)
|ETF||Expected Purchase Date*|
|*Based on index methodology documents|
This hyper-targeted ETF from Global X is designed to offer exposure to the social media industry, so it should come as no surprise that Facebook will be a component stock. SOCL currently consists of both domestic and international social media companies, including LinkedIn (LNKD), Tencent Holdings, Sina Corp, and Google (GOOG).
This fund will be one of the first (most likely the first) U.S.-listed ETF to include FB stock. The underlying Solactive Social Media Index will include new IPOs after just five trading days, meaning that FB should be included in SOCL within about a week of the IPO [see also High Tech ETFdb Portfolio].
PowerShares QQQ (QQQ)
As major exchanges were battling for the rights to be the primary listing destination for Facebook, the Nasdaq announced an interesting change to the methodology used to construct and maintain the popular NASDAQ-100 Index. The so-called “seasoning period” that new listings must endure before being added to the tech-heavy benchmark was recently shortened from one year to three months–meaning that FB shares would be eligible for inclusion into the NASDAQ sometime in August. That could be an interesting stretch for FB stock; with some $50 billion in assets linked to the Nasdaq-100, the addition of the social media company will trigger a wave of repurchases.
According to NASDAQ, the list of annual additions and deletions from the NASDAQ-100 Index is generally announced in early December, with replacements becoming effective after the close of trading on the third Friday in December. So Christmas Eve could be the first trading day for QQQ with Facebook as an official component of its underlying index–timing that could add a little bit of additional stress to the holidays for traders and portfolio managers this year [see also 3 ETFs For A Euro Zone Double-Dip].
Technology SPDR (XLK)
By far the most popular ETF in the Technology Equities ETFdb Category is XLK, which offers exposure to the U.S. technology market. XLK includes all the major technology giants, with big weightings afforded to Apple, IBM, Microsoft, AT&T, and Google [try our Free ETF Stock Exposure Tool]. But it might be awhile before FB finds its way into this fund, as the stock won’t be eligible for inclusion in the underlying index for quite some time (potentially).
In order to make it into the S&P Technology Select Sector Index, a company must be included in the S&P 500. To make that cut, stocks must meet a number of different criteria. One of those is a 50% public float–meaning that at least half of the company’s shares must trade on a public exchange. Facebook won’t come anywhere near that threshold with its IPO, as it is expected that the company will list only a fraction of its shares later this week. In all likelihood, fewer than 10% of all FB shares will be available to the public after the IPO, meaning that the company still has a long ways to go before it becomes a card-carrying member of the S&P 500. In other words, don’t hold your breath to see FB in XLK.
ETRACS Next Generation Internet ETN (EIPO)
As the name suggests, EIPO is another exchange-traded product that will soon include Facebook as a component stock. And based on the rules of the underlying UBS Next Generation Internet Index, FB stock could be included within a few weeks of the IPO. The index is rebalanced on a monthly basis, at which time new securities that meet the inclusion criteria may be added. Specifically, this index is rebalanced at the close of business on the first Tuesday of every month, meaning that the index should include FB stock when the opening bell rings on June 6 [see also 5 Simple ETF Trading Tips].
As an interesting side note, the index to which EIPO is linked is market cap weighted–but calculates market cap including all share classes regardless of who holds them. In other words, FB should get a pretty hefty weighting in this ETN, since there is no adjustment made to account for the fact that most shares will still be held by insiders after the IPO.
Disclosure: No positions at time of writing.
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