Facebook’s internet and social media ETF friends

May 20th, 2012 | By | Category: Equities

Facebook’s stock market debut on Friday was more of a sputter than a splash. The company, which many thought would fly out of the blocks LinkedIn style (LinkedIn more than doubled on IPO day), managed only to close up a mere 23 cents (0.61%) – and that was after a little help from the underwriters.

Facebook’s internet and social media ETF friends

Facebook's IPO precedes its inclusion into a number of social media, internet and technology-focused ETFs

However, let’s not underestimate Facebook. It is a giant of a company in terms of market value and users ($105bn and 901m respectively) and, by the sheer magnitude of its valuation, will effect a large influence on technology-biased indices such as the Nasdaq 100. Moreover, it will, in time, form a significant component in many technology and internet-focused ETFs, as well as many mainstream equity trackers.

So, before profiling the funds that are likely to hold it, is the valuation justified? Victor Basta, managing director at Magister Advisors, a specialist M&A advisor to technology companies, says: “Facebook will need to generate annual revenue of $30-$40 billion in order to justify the valuation of the business.  This is a ten-fold increase over the revenues that it currently generates.  The question is ‘where from?’  Advertising is fundamental currently, and Facebook will have to channel ad dollars away from other players and onto its platform to achieve this. Enhanced services to companies would also be a logical step.”

FEATURED PRODUCTS

The following Social Media, Internet and
Technology ETFs/ETNs are likely to eventually
hold significant weights in Facebook, pending
index re-balances.

US-listed ETFs/ETNs:

Global X Social Media ETF (SOCL)

First Trust Dow Jones Internet Index ETF (FDN)

UBS ETRACS Next Generation Internet ETN (EIPO)

– UBS ETRACS Monthly 2x Leveraged
Next Generation Internet ETN (EIPL)

PowerShares Nasdaq Internet Portfolio ETF (PNQI)

London-listed ETFs:

Amundi ETF Nasdaq 100 (ANXU)

Credit Suisse Nasdaq 100 ETF (CNX1)

– Technology S&P US Select Sector Source ETF (XLKS)

Lyxor ETF MSCI World Information Technology (TNOG)

DB X-trackers MSCI World Information Technology
TRN Index ETF (XWSN)

(full details below)

Basta reckons Facebook will have to expand strategically into the enterprise market. “Facebook to date is a consumer-facing business.  The question for management is “where next?”  One logical direction would be the enterprise market – looking at ways in which Facebook can be at the heart of employee-to-employee communication and collaboration,” says Basta.

Whatever the long-term prospects, Facebook looks somewhat overvalued based on conventional valuation measures. At $38, the company trades at about 76 times forecast 2012 earnings and 89 times 2011 earnings. Search-engine giant Google looks much more reasonable, trading at 14 times projected 2012 earnings.

Then there are question marks surrounding the company’s ability to generate revenue from mobile users and concerns about the effectiveness of advertising on the platform, as highlighted by General Motors’ decision to cease advertising on the site. And then there is revenue growth – recent results suggested that it had already begun to slow.

However, Facebook has being drawing the attention of doom-mongers and naysayers for years now, and each time Facebook has brushed them aside with blistering numbers – whether it be number of users, mobile growth, time spent online, or number of pages.

With over 900m users, it has a huge economic moat (sustainable competitive advantage) and certainly has the potential to generate significant revenues. Furthermore, its eventual addition to widely-tracked indices such as the S&P 500, Nasdaq-100 and Russell 1000, as well as technology-sector indices, ensures a degree of buying support from index-tracking funds.

Indeed, as already mentioned, many ETFs will eventually allocate some portion to Facebook. The following, however, are likely to give it a significant weight and be among the first to hold it. Moreover, for investors wishing to gain targeted exposure to social media and internet-related companies, the following funds offer a quick and easy route to this exciting and potentially disruptive theme.

US-listed ETFs

Global X Social Media ETF (SOCL)
The Global X Social Media ETF (SOCL), the world’s first ETF to track companies operating in the social media sector, is the “one stop shop” for social media exposure, including companies that provide social networking, file sharing, and other web-based media applications.  SOCL tracks a proprietary benchmark of 25 social media stocks including names such as Groupon, LinkedIn, Pandora, Google, Tencent, Sina and Zynga. Facebook will be added to the fund’s index, the Solactive Social Media Total Return Index, at the close of trading on the fifth day of public trading of the stock at the Nasdaq. SOCL is listed on the Nasdaq and has a TER of 0.65%.

First Trust Dow Jones Internet Index ETF (FDN)
For slightly broader exposure to the internet in general, the First Trust Dow Jones Internet Index ETF (FDN) is a good bet.  FDN is based on the Dow Jones Internet Composite Index. The Dow Jones Internet Composite Index is a blue-chip measure of internet-related companies. To be eligible for inclusion in the index, a company must currently be included in the Dow Jones US Index and also generate at least 50% of its annual sales/revenues from the internet. It is made up of 40 stocks: 15 from the Internet commerce sector and 25 from the Internet services sector. Major holdings include names such as Google, Amazon, eBay, Priceline, Salesforce and Yahoo. Facebook will likely be added once it has gained a three-month trading history. FDN is listed on the NYSE Arca and has a TER of 0.60%.

UBS ETRACS Next Generation Internet ETN (EIPO)
The UBS ETRACS Next Generation Internet Exchange Traded Note (ETN) (EIPO) provides exposure to the performance of the UBS Next Generation Internet Index. The UBS Next Generation Internet Index is intended to measure the performance of internet companies listed on the NYSE and Nasdaq that have been publicly traded for less than three years. The index currently comprises 23 social networking, internet software and internet services stocks, representing the latest/newest generation of internet-related stocks. Major holdings include LinkedIn, Yandex, Groupon, Youku and BankRate, as well as companies such as Pandora Media, RenRen and Angie’s List.  The index is rebalanced at the close of business on the first Tuesday of every month, meaning that Facebook should be included when the opening bell rings on 6 June. EIPO is listed on the NYSE Arca and has a TER of 0.65%.

UBS ETRACS Monthly 2x Leveraged Next Generation Internet ETN (EIPL)
2x monthly leveraged version of the above. NYSE Arca listed, TER 0.65%.

PowerShares Nasdaq Internet Portfolio ETF (PNQI)
The PowerShares Nasdaq Internet Portfolio ETF (PNQI) is based on the Nasdaq Internet Index. The Nasdaq Internet Index is designed to track the performance of the largest and most liquid US-listed companies engaged in internet-related businesses and that are listed on one of the major US stock exchanges. Major holdings include Amazon, eBay, Priceline, Google, Baidu, Yahoo and Groupon. Facebook will likely receive a large allocation. However, while the index is rebalanced on a quarterly basis, the annual review process doesn’t happen until March, meaning it could be March 2013 before Facebook is included. PNQI is listed on the Nasdaq and has a TER of 0.60%.

London-listed ETFs

For UK investors wishing to purchase a London-listed fund, the following ETFs will almost certainly include Facebook as a significant holding, though not straight away – the timing of Facebook’s inclusion depends on individual index reconstitution and rebalancing rules. Furthermore, Facebook’s weight is likely to be significantly less than in the social media and internet-focused funds listed above.

Amundi ETF Nasdaq 100 (ANXU)
Tracks the Nasdaq 100 Index. The Nasdaq-100 Index includes 100 of the largest non-financial securities listed on the Nasdaq Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. It does not contain securities of financial companies including investment companies. Technology companies make up almost two-thirds of the index. Major holdings include Apple, Microsoft, Google, Oracle and Intel, as well as internet companies such as Amazon, eBay, Priceline, Baidu and Yahoo. Facebook is likely to enter the index at the December rebalance. ANXU is listed on the London Stock Exchange (LSE) and has a TER of 0.23%.

Credit Suisse Nasdaq 100 ETF (CNX1)
Tracks the Nasdaq 100 Index (see above).  CNX1 is listed on the London Stock Exchange (LSE) and has a TER of 0.33%.

Technology S&P US Select Sector Source ETF (XLKS)
The Technology S&P US Select Sector Source ETF (XLKS) tracks the S&P 500 Select Capped 20% Technology Sector Index. The index comprises the technology companies that are members of the S&P 500 index. Each constituent is weighted by float-adjusted market capitalisation and capped at 20%. The excess weight is distributed among all the other uncapped stocks within the index. Major holdings include Apple, IBM, Microsoft, AT&T, Google. Facebook will be eligible for inclusion in the S&P 500 Index in November (S&P typically requires newly listed companies to trade for 6 to 12 months before considering them for inclusion), and thus it should eventually work its way into the fund. XLKS is listed on the London Stock Exchange (LSE) and has a TER of 0.30%.

Lyxor ETF MSCI World Information Technology (TNOG)
The Lyxor ETF MSCI World Information Technology (TNOG) tracks the performance of the MSCI World Information Technology Total Return Net Index. The MSCI World Information Technology TRN Index reflects the performance of Information Technology companies listed in developed equity markets. Major holdings include Apple, IBM, Microsoft, Google and Intel, as well as internet companies such as eBay and Yahoo. This Index is reviewed and rebalanced on a quarterly basis, meaning Facebook may get a look in as early as August (the next review). TNOG is listed on the London Stock Exchange (LSE) and has a TER of 0.40%.

DB X-trackers MSCI World Information Technology TRN Index ETF (XWSN)
Tracks the MSCI World Information Technology (see above).  XWSN is listed on the London Stock Exchange (LSE) and has a TER of 0.45%.

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