Social Media ETF in Focus As Twitter Plans IPO

Social media stocks remain in focus, as the space is reaching new milestones this year. Popular names such as Facebook (FB) and LinkedIn (LNKD) impressed with their performances last quarter, leading to a torrid run in the ETF tracking these companies.

In fact, the Global X Social Media Index ETF (SOCL) has surged over 49% in the year-to-date time frame, clearly outpacing the broad technology fund (XLK) and U.S. market fund (SPY) by wide margins. This trend is expected to continue in the coming weeks as more good news is in store for the ETF (read: Social Media ETF on Fire After String of Earnings Beats).

Yesterday, the fastest growing social media firm, Twitter, revealed its plan to go public and filed the paperwork with U.S. regulators. This offering would be the world’s largest in the technology space since Facebook went public in May 2012.

Following the IPO – expected to be completed in early 2014 – SOCL would add Twitter in its roster. However, the timing remains unclear as to when Twitter will find its way to the market and then to SOCL’s holdings.

Twitter IPO: A Boon or Bane for the Social Space?

This IPO is likely to prove beneficial for the social media fund. Backing our claim is the initial boom in the social media ETF space when Facebook announced its IPO plans in February last year. The ETF garnered enough investor interest on FB IPO talks with an elevated average daily volume of nearly 50,000 shares (read: 3 ETFs in Focus on Facebook's Earnings Beat).

However, after going public in May 2012, Facebook slipped below its IPO price on the second trading session and began sliding more than 18% in just three trading days and nearly 27% in the month of listing.

This is because the pricing issue marred the company’s transition to being public. Facebook had overpriced its valuation to $100 billion prior to the IPO while its actual valuation was $60–$75 billion.

Since Facebook was added to SOCL holdings at the close of the fifth trading session following the company’s IPO, it took a toll on the ETF returns as well.

Coming to Twitter IPO talks, market researchers expect this social media ace to evade the problems faced by Facebook, as the company would adopt a different pricing strategy for its IPO price. Additionally, Twitter will likely benefit from the boom in technology IPOs that we having being seeing lately, as well as the positive sentiment in the space (read: Profit from the Booming IPO Market with This ETF).

Moreover, Twitter’s current valuation is estimated at around $9.0 billion by the Wall Street Journal. This is significantly lower than Facebook’s valuation of $100.0 billion at the time of its IPO in 2012.

Considering this, investors should definitely keep a close eye on the movement of the social media ETF, both in the weeks ahead, and once the Twitter IPO finally happens (see: all the Technology ETFs here).

SOCL in Focus

The fund tracks the Solactive Social Media Index, which measures the performance of companies involved in the social media industry, including companies that provide social networking, file sharing, and other Web-based media applications.

In total, the product holds 27 securities in the basket and is heavily concentrated across each security. The top three holdings – Tencent Holdings, Facebook and Sina Corp – together make up for more than 36% of the total assets. In terms of country exposure, U.S. firms take half of the portfolio, closely followed by China (28%) and Japan (13%).

However, despite the solid performance and the in-focus nature of the sector, the fund remains relatively unknown. In fact, the product has amassed only $23.7 million in assets and sees light volumes on most days. The ETF charges 0.65% in fees and expenses (see more in the Zacks ETF Center).

Bottom Line

The Twitter IPO news has come at the perfect time as the social media firms are now enjoying a huge rally. Facebook has now recovered from all the losses that it faced during the troubled IPO times, and it is currently trading at an all-time high. LNKD shares are up more than 170% from their first day of trading, while Yelp is up 150% since its first trade as well.

In this backdrop, investors should cautiously watch the performance of SOCL in the tech space. Currently, the ETF has a Zacks Rank 3 or ‘Hold’ rating, and it is a great barometer for global sentiment regarding social media investing going forward.

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