EIPO Etracs Next Generation Internet Etn Due July 19, 2041

Social media companies have become increasingly popular in recent months as this corner of the market represents one of the few growth opportunities left for developed market investors. Internet usage continues to expand in both the U.S. and abroad while an increasingly large share of that time is spent on social media sites. In fact, according to recent research, only email and search engine use make up a greater portion of “time online” than social networking sites, suggesting that a huge market remains relatively untapped by most. Meanwhile, thanks in part to this trend, competitive moats continue to expand for firms such as LinkedIn or others in the social networking space as the ‘network’ effect becomes ever harder for new entrants to overcome, making this corner of the tech world a pretty juicy one for most investors.

Thanks to this recent bump in interest, firms have begun to lineup in order to help satisfy investor demand in the sector. The recent launch of the E-TRACS Internet IPO ETN (EIPO) was a good start for many as the product tracks an index of recently IPO’d companies and offers heavy weightings in many social media firms such as LinkedIn and Youku. Yet, the product also gives high weights to Russian search engine giant Yandex, Bankrate, and even OpenTable as well. This suggests that the product isn’t exactly a great proxy for the social media sector and that others could come in and offer investors more targeted exposure.

Due in part to the relatively untargeted nature of the product, as well as investors’ traditional (but generally unfounded) fears over ETNs and the credit risks associated with these notes, many might be interested to note Global X and the company’s brand new fund, the Social Media Index ETF (SOCL). The new product seeks to track the Solactive Social Media Index which looks to track the performance of companies involved in the social media industry, including companies that provide social networking, file sharing, and other web-based media applications.

While many investors may assume that this product is dominated by companies such as LinkedIn or Groupon, which currently are among the most popular U.S. firms in the field, the composition of the product is actually very different. In fact, according to the recent fact sheet for the product, American companies make up just over 26.3% of total assets, putting the U.S. in second place in terms of country exposure. Instead, the top weighting goes towards Chinese securities at 36.9% thanks in large part to 10% weightings for Tencent  Sina Corp, and NetEase.com. Other top country weightings go towards Japan (19.5%) and Russia (9.5%) while a smattering of other nations make up the small remainder of the fund.

This composition suggests that the fund may be more volatile than some might have initially thought, especially considering that American mainstays such as Google and Groupon combine to make up just 9% of the total fund.  Furthermore, investors should also note that the product is relatively expensive—and no cheaper than EIPO—with an expense ratio of 0.65% per year. Additionally, with just 26 component securities, company-specific risk is still a very real issue, especially considering that four securities make up about 40% of the total fund’s assets.

In other words, while the social media sector may be an interesting market for some investors, this ETF is by no means a sure thing. The product has intense concentration issues and has heavy exposure to often volatile emerging markets. This could meant that even if social media takes off, a slowdown in markets such as Russia or China could create a rough stretch for investors in this product.  Yet, with that being said, SOCL is really the best options that investors have in the space, and is a far better choice than EIPO for those seeking broad social media exposure. So, those who are dead-set on buying up securities in this corner of the market could do far worse than this brand new fund from Global X, but most other investors, especially those with a longer time horizon, would be better off waiting until more companies IPO in the space and the holdings list fills out a little more.

(For more ETF & Mutual Fund news, check out the Zacks Fund Page)

 
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