Social Media ETF Delusions

July 27, 2011

With all the talk about another tech bubble, no one is asking the most important question of all: How much of these companies will even be available to invest in?

Whether or not we’re in a bubble, this time around the rise in technology-related stocks has centered on certain trends in the industry—notably social media and cloud computing—whereas the bubble of 1999-2000 touched any company that had anything to do with the Internet.

It’s no surprise that the ETF industry is taking this opportunity to launch more technology ETFs, and very specific ones, at that. We already have ETFs for cloud computing and smart phones, and a couple of Internet IPO ETNs from UBS that Dennis wrote about in his latest blog. We even saw Global X filing for an ETF for canvassing the still-developing world of social media.

I have nothing against niche funds. As Devin Riley pointed out in his recent blog, niche funds are gathering more and more assets. More choices for investors is a positive. I only wonder about the execution. Is the fund going to provide the exposure that investors are looking for?

Both the First Trust ISE Cloud Computing Index Fund (NasdaqGM: SKYY) and the First Trust Nasdaq CEA Smartphone Index Fund (NasdaqGM: FONE) include large nonpure-play conglomerates. This begs the question: What will the social media ETF look like?

There are plenty of obstacles to creating a social media ETF. The largest comes from the number of companies that are still private. The most sought-after social media firms have yet to go public, including Facebook, Zynga and Twitter. The pure-play firms that are public are, for the most part, small-cap.

Then there’s the problem with outstanding float. LinkedIn (NYSE: LNKD) shares skyrocketed after its initial public offering in May. Part of the reason it shot up was because only 7.84 million shares, or less than 10 percent of total shares outstanding, were being offered.

Similarly, Pandora (NYSE: P) has only 8.8 percent of its shares outstanding currently floating in the market, which makes you wonder what the significance is of the proposed Global X ETF being able to invest in Web-based media applications.

You also have to wonder what percentage of the fund’s holdings will be pure-play companies.


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