What Snap’s Pop & Drop IPO Means For ETFs

When Snap, parent company of the Snapchat app, went public last week, it was the hottest initial public offering in more than two years.

Hoping to buy in to the latest social media trend, investors bought up Snap's stock hand over fist, propelling shares higher by 44% in their trading debut. At its peak, Snap was valued at more than $34 billion ($29.44/share) and was up more than 70% from its IPO price.

The flurry of trading in Snap shares was from investors directly buying into the stock. Most ETFs don't own Snap―at least not yet―and that's not necessarily a bad thing.

Pop And Drop

After peaking last Friday, shares of the company lost nearly a third of their value to briefly trade below $21. That's the lowest price for the stock since it began trading on the New York Stock Exchange, though still above the IPO price of $17 (large institutional investors that are clients of the underwriting banks are typically the only ones with access to shares at the IPO price).

If Wall Street analysts are right, the post-IPO swoon in Snap shares may not be over. According to CNBC, not a single analyst has a "buy" rating on the stock, while six have "sell" ratings on it amid concerns about valuations and slowing user growth.  

On the other hand, the company's app boasts a massive 158 million daily active users, and grew revenue sevenfold from 2015 to 2016.

In essence, bulls hope that Snap becomes the next big social media powerhouse like Facebook, while bears pan it was the next Twitter, a hyped-up company that ends up disappointing investors.

No Guarantee Of Place In S&P 500

Given these mixed signals for Snap’s stock, perhaps it's fortunate that most ETFs won't buy in to the company until the dust settles. It will be at least six to 12 months before the committee for the S&P 500 considers including it for inclusion in the large-cap index.

That's just the minimum amount of time. It took even longer for other social media heavyweights to join the index. For Google and Facebook, it was 19 months before they were added to the S&P 500. Meanwhile, Twitter has never been included in the S&P 500 despite being larger than many of the index's other components, highlighting the fact that a big market value doesn't guarantee a spot in the venerable index.

That means it will be awhile―if ever―before investors see Snap as a holding for the SPDR S&P 500 ETF (SPY), the Technology Select Sector SPDR Fund (XLK) and many other funds tied to the S&P 500.

Voting Rights Concerns

Adding another roadblock to Snap's journey into ETFs is resistance on the part of some investors to the company's voting structure. None of the Snap shares offered on the market last week have voting rights―an unprecedented situation for an IPO―which leaves firm control of the company in the hands of its two founders.

Balking at what it sees as an unfair situation, the Council of Institutional Investors has urged S&P Dow Jones Indices and MSCI to exclude Snap from their indices, according to a Reuters report. Both index providers are reviewing the situation, but a decision is not expected for at least a few months.

If S&P and MSCI don't include Snap in their indexes, that means the plethora of ETFs that track those indices won't include it either.

Prominent Place In Some ETF

With all that said, regardless of what S&P and MSCI decide, a spot for Snap is all but guaranteed in at least some ETFs. The Vanguard Total Stock Market Index Fund (VTI) is a fund that holds all U.S. small cap, midcap and large-cap stocks. It tracks a CRSP index that reconstitutes quarterly. That means Snap could be a VTI holding by June, according to current index rules for IPOs.

Of course, whether Snap ends up in an investor's broad stock market ETF is relatively inconsequential. Funds such as VTI are highly diversified, and one company—no matter how big or exciting it is—won't noticeable impact returns.

In contrast, for some niche ETFs, Snap has the potential to significantly impact returns. Take the Global X Social Media ETF (SOCL), with $84 million in assets. It tracks up to 50 social media companies from around the world, including Facebook, Tencent, Twitter, Yandex and NetEase.

YTD Return For SOCL

As one of the largest social media companies today, Snap has a prominent place in SOCL's portfolio. As of Wednesday, the company accounted for 4.4% of the fund, making it the 12th-largest holding. 

Snap Included In IPO ETF

Another ETF where Snap will likely feature prominently is the $682 million First Trust U.S. Equity Opportunities ETF (FPX). FPX buys stocks of companies that recently went public, hoping to capitalize on the rapid growth that new public companies often see.

FPX holds a basket of the 100 largest IPOs, with an aim to keep them in its portfolio for their first 1,000 trading days, or about four years.  Current top holdings include Kraft Heinz, AbbVie, Shire, PayPal and Facebook.

Snap is already a holding for FPX, representing a tiny 0.28% of the fund's portfolio, according to the issuer website. That figure is likely to increase substantially at the next quarterly rebalancing later this month.

A smaller rival IPO product, the $14 million Renaissance IPO ETF (IPO), doesn't include Snap as a component yet, but it's expected to become one at the quarterly rebalancing later in March. The ETF keeps its holdings for two years. Top components currently include First Data, TransUnion, Shopify, Univar and Blue Buffalo.

YTD Returns For FPX & IPO

Contact Sumit Roy at [email protected]