By Ross Kenneth Urken
(As Published On – www.dailyfinance.com)
Even for expert stock pickers, it’s difficult to make a fully educated investment in the social media sphere. As Friday’s Facebook IPO — and its gory aftermath — proves, any theory one might have is ultimately little better than speculation.
After all, the first few trading days following any IPO generally bring a lot of short-term plays with share values jumping up and down — and Facebook was no exception. It’s also difficult to predict — as Groupon likewise demonstrated this year — when a social media stock will tank.
However, if you’re still looking to get in on the Facebook action, but want to mitigate your risks, the social media ETF from Global X Funds might be the right choice.
A New Breed of ETF
Much like a traditional mutual fund, an exchange-traded fund is an investment fund that offers a stake in a pool of investments — stocks, bonds, commodities. The key difference: An ETF allows for intraday trading of shares. Mutual funds trade once a day — and if your fund is falling like a stone, a day can feel like a long, expensive time. ETFs, which usually track an index like the S&P 500, can also be attractive because of their low costs and tax benefits.
Interestingly, despite their nearly two decades of rising popularity, the first ETF to focus of the social media wasn’t launched until November 2011.
The Global X Social Media Index ETF (SOCL) seeks to reflect this global industry in a single ETF and includes companies from all over the world that provide social networking, file sharing, and other web-based media applications. As more companies in the industry offer IPOs, the Global X Social Media Index ETF will add them — though not until a bit after their public debuts. According to The Wall Street Journal’s Market Watch, Facebook stock will be added to the Solactive Social Media Index — the index SOCL tracks — on Thursday, and the ETF will follow suit on Friday.
“Getting access through an ETF is a way to get invested in Facebook but diversify away from a specific company and get play on the social media industry as a whole,” said Alex Ashby, a Global X Funds research analyst.
The Advantages Of Casting A Wide-Net In Social Media
“One of the benefits of ETFs more generally — you get that company diversification,” Ashby said. “In social media, that has more of an effect than other [sectors]. Specific companies may be a little more volatile, and we expressed caution to people looking to get in on Facebook on the first day.”
Other social media stocks like Groupon (GRPN) and Zynga have had periods of popularity, but also moments of heavy doubt, such as when Groupon revealed accounting issues in February. With ETFs, there are fewer drastic drops in one’s portfolio, as the funds are diversified. Tremors here or there get cushioned, and that’s important in a relatively immature sector.
“When you have an industry that is very young, there’s a lot of IPOs of companies that are only now reporting earnings and investors are learning how to value these companies,” Ashby said.
The Risks Of Going Solo In Social
But unlike ETFs in stable industries with large cap companies, like those focused on utilities, telecommunications or consumer staples, for example, the social media ETF is full of small- and mid-cap companies that haven’t necessarily developed steady revenue streams. As a result, they have more growth potential than the value plays, but also represent much more volatility.
Ted Jenkin, co-CEO and founder of oXYGen Financial in Alpharetta, Ga., believes an ETF is a prudent way to buy into social media, because the sector has all the makings of a bubble perfect storm.
“If younger investors have learned anything from the [first] dot-com bubble that burst in the early 2000s, it’s that many of these companies that go public will either fail or get bought out by someone bigger,” Jenkin said. “We are kind of in a dot-com 2.0 phase right now and rather than trying to pick whether Groupon, Facebook, Zynga, Zillow, Yelp, Pandora, or any of the others will make it, this portfolio allows you to get a basket of social media companies all in one portfolio providing much more diversification than picking one stock.”
ETFs are also attractive as a defensive play: Because they trade intraday, you can set up more flexible stop losses than a mutual fund would allow.
Ashby, though, is more bullish on the future of social media investments.
“Most investors have experienced that previous Internet cycle where companies were growing very rapidly and applying that knowledge to current companies to evaluate them properly,” he said. “And some of the metrics being used are different. Then, the thing being looked at was page views and people equating that with revenues and future growth.”
Of course, page views in the dot-com boom didn’t equate to future growth or the ability to monetize those clicks with advertising, for instance. “Social media companies are starting to have real revenue growth and in the early stages of monetizing the networks.” Ashby said. “With an ETF, you don’t have to predict which specific company is going to be successful if you believe in the industry.”
How Much Can Social Media Companies Keep Growing
The big question mark, though, is whether these social media platforms can maintain their momentum.
The networks themselves are generally thought to be secure business models.
“A lot of these companies are still very focused on building a network, and they’re building business with a very significant barrier to entry,” said Bruno del Ama, CEO of Global X Funds. “It’s difficult to replicate the network. We go on Facebook, because our friends are on there. Or LinkedIn, because all our professional contacts are there.”
Social media allows businesses to connect directly with customers. According to BursonMarsteller, some 84% of Fortune 100 companies use branded social media channels, while nearly 81% of the top Asian companies do. Social media use now extends to almost one out of every three businesses, but that leaves it with plenty of room to grow, according to Network Solutions. In 2011, 65% of adult internet users said that they used a social networking site, more than double the 29% that did so in 2008, according to the Pew Research Center.
Investors see that high and rising popularity and may predict massive growth in earnings. Google, for instance, launched its IPO at a very high price-earnings multiple — and then had a 100% annual growth rate. It’s stock went from $80 a share to $400.
But investors have to avoid letting expectations of similar results get too fevered.
“You have to consider what’s a realistic growth rate and what’s sustainable,” del Ama said.
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