But there are also downside risks associated with Internet stocks.
Social media stocks and related ETFs have staged a rally in recent months after a sell-off in the first half of the year that sent the market’s only social media ETF spiraling downward of 22 percent.
Facebook recently reported revenue for the second quarter totaling $2.91 billion, an increase of 61 percent, compared with $1.81 billion in the second quarter of 2013. Also, Twitter reported second-quarter revenues of $312 million, up 124 percent year-over-year.
“Facebook’s growth has been very strong, and it continues to expand significantly in terms of mobile, which really has been the driver for revenue gain,” said Scott Kessler, an Internet equity analyst at S&P Capital IQ.
“A lot of people without having a full command of the facts suggest that Facebook is richly valued and, honestly, we just don’t see that at all,” he added.
Kessler noted that the firm has a “buy” rating for Facebook and a “hold” for Twitter, which recently made substantial changes to its management teams over the past few months.
“In the case with Twitter, a lot of people are optimistic about the new management team but those folks need to deliver,” said Kessler, adding that if the market declines further, there is the possibility that investors could see these higher-beta names underperform the market on the downside.
In turn, ETFs that make either Facebook, Twitter—or both—their top three holdings have reversed course in the second quarter, including the:
Global X Social Media Index ETF (SOCL | B-19) AUM: $141.5M; YTD returns: -7.4 percent
SOCL is the only ETF on the market that focuses on social media companies. It caps the weights of pure-play social media companies at 10 percent during its rebalancing, which occurs twice a year, and the weights of non-pure play companies at 4.75 percent.
SOCL was one of the earliest ETF buyers of Facebook and currently makes the social media behemoth its second-biggest holding. SOCL underweights U.S. companies relative to its global technology peers, since it excludes three of the four biggest U.S. tech companies (Apple, Microsoft and IBM).
The fund dropped some 22 percent in earlier in the year but has rebounded strongly in recent months thanks to Facebook’s bounceback. It has an expense ratio of 0.65 percent, or $65 for every $10,000 invested.
Renaissance IPO ETF (IPO | F-32) AUM: $26M; YTD returns: 0.6 percent
IPO tracks a market-cap-weighted index of recent U.S.-listed IPOs. The fund acquires new issues within 90 days or sooner after IPO, and sells after two years.
Its direct rival, the First Trust US IPO (FPX | F-48), holds stocks for four years, which explains Tesla’s presence in FPX and absence in IPO. Concentration in single names like Twitter, IPO’s largest holding, looms larger here, for better or worse.
Investors who want a newly listed stock should just buy the stock, but for those who want systematic exposure to new listings, then an ETF like IPO (or FPX) fits the bill. IPO charges a competitive expense ratio of 0.60 percent, or $60 for every $10,000 invested.
First Trust US IPO (FPX | F-48) AUM: $478M; YTD returns: 3.8 percent
Charts courtesy of StockCharts.com
FPX tracks a market-cap-weighted index of the 100 largest U.S. IPOs over the first 1,000 trading days of each stock. Stocks must pass additional quantitative screens to make it into the index.
FPX tries to deliver outperformance by holding stock in firms that had their IPO within the last four years. Specifically, the fund's index selects the largest and most liquid of these companies, with exposure to any one firm capped at 10 percent.
By rule, companies drop out of the fund’s index four years after their inclusion at a date closest to the index’s rebalancing date. Facebook is currently the fund’s biggest holding.