Facebook's Effect On Tech ETFs

May 18, 2012

Facebook’s IPO is the news of the day. What does it mean for ETF investors?


It might be easy to get caught up in the Facebook hype today. Maybe not for the reasons Mark Zuckerberg would want, though.

The price action on Facebook’s initial public offering has been dismal. As I write this, the stock’s bid price is hovering around $40, certainly lower than the $45 price point some analysts were calling for. It doesn’t look like the IPO everyone hoped for.

The truth is, the tech sector in general looks pretty bad. Consider the “Q’s”: The PowerShares QQQ Trust (NasdaqGM: QQQ) is down 7.5 percent this month.

That’s disappointing for the ETF analog for the broad U.S. tech sector and, if anything, it makes me question the market timing behind the world’s most famous social network offering up its shares.

In fact, looking at an even closer proxy for Facebook, the Global X Social Media ETF (NYSEArca: SOCL), makes the timing look downright terrible. That ETF, which exclusively tracks publically traded social media companies, has dropped nearly 11 percent over the past month.


Picking on the tech sector here might be missing the point.

U.S. equities across the board have softened up in the past month. Resurfaced fears over European sovereign debt have investors curtailing risk as fast as possible. Need an easy example?

The SPDR S&P 500 ETF (NYSE Arca: SPY) dropped 5.5 percent over the past month. That alone is a big indicator that people just won’t care about a hot new tech IPO. Investors are too busy watching the big picture to get distracted by the flavor of the month, no matter how many “likes” it has.

To be fair, Facebook planned its IPO months ago, and couldn’t have foreseen the market’s movements. The current market perception of the IPO, though, is that it has been underwhelming.

Perhaps a more accurate view is that Facebook launched into a market with serious head winds, with macroeconomic concerns dominating investor sentiment.

Still, don’t count the IPO as a disappointment just yet. When market waters calm a little, we’ll all have a better sense of where Facebook stands relative to its peers.

So what does Facebook’s launch mean for ETF investors? Back in April, Carolyn Hill discussed Facebook’s upcoming inclusion into the “Q’s”.

The social media giant will join the $30 billion Nasdaq 100 ETF in September, with several other large indexes following suit over the year. The big question isn’t when Facebook will join the ETF world, but rather, how will its inclusion affect performance?

It’s not an easy question to answer, and my guess is that, for the time being, the market will continue its trend of sitting and waiting for a much clearer sign.

Given its immature business model, it’s still unclear if Facebook’s inclusion into indexes this year will be a boondoggle for investors or a source of positive returns for years to come.


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