EIPO Etracs Next Generation Internet Etn Due July 19, 2041

As the economy starts to improve, the IPO market has become increasingly popular among a variety of investors. Many of these newly public companies are either in the tech or social media space, giving investors access to firms that are in one of the few high growth areas in the developed world.

In fact, over the last twelve months, a variety of names have debuted in this sector ranging from Zynga (ZNGA) and Groupon (GRPN) to LinkedIn (LNKD) and Yelp (YELP), allowing investors to broaden their exposure to these risky but potentially lucrative market segments.

Beyond these names, investors are also looking forward to the long-awaited IPO from Facebook while other smaller companies seem poised to ride this wave of optimism to the stock market as well (read ETF Investors: Beware The Coming ETN Backlash).

However, the results of these internet 2.0 firms have been mixed at best so far in their short histories as some have managed to post solid gains while others have failed to maintain their IPO price. For example, ZNGA is up more than 35% since its debut while GRPN has lost about 37% in comparison, suggesting that it has been hit or miss so far in the segment (see Three Technology ETFs Outperforming XLK).

Given this extreme volatility, some investors may be worried about taking the plunge on any of these individual securities. As a result, a basket approach may be the way to go instead, allowing investors to play the sector more broadly, hoping that the winners outweigh the losers and that the space continues to grow overall. For investors seeking this technique, we have highlighted three diversified ETFs below which could offer excellent exposure to the space:

ETRACS Next Generation Internet ETN (EIPO)

This note looks to give investors exposure to a basket of ‘next generation’ internet firms generally consisting of firms in the social networking, internet software, and internet service stocks. The portfolio consists of 20 stocks in total and the benchmark imposes a three year age limit on holdings, ensuring that constituent securities remain extremely relevant and at the forefront of the industry.

In terms of holdings, the portfolio is heavily skewed towards small securities; large caps make up just 11% of the total portfolio. Meanwhile, from a country perspective, the U.S. accounts for close to two-thirds of assets while China (15%), Netherlands (10%), the UK (8%), and Australia (3%) round out the rest (see Why SSDD Is The Top Tech ETF).

For individual securities, the top spots are dominated by developed market companies from the U.S. and Europe. Three companies—Yandex, LinkedIn, and Groupon—are the only ones to make up at least 10% of the portfolio, ensuring relatively high levels of concentration. In fact, the top ten holdings account for nearly three-fourths of the total portfolio.

Investors should also note that there is a leveraged version of this product, the ETRACS Monthly 2x Leveraged Next Generation Internet ETN (EIPL). This note resets exposure on a monthly basis and charges investors a similar expense ratio of 65 basis points. Volume is also light in this product, but the leveraged exposure could offer investors higher returns—or losses—depending on how the market plays out (read Understanding Leveraged ETFs).

Global X Social Media Index ETF (SOCL)

For a targeted play on the social media industry, investors should take a closer look at Global X’s SOCL. The ETF tracks the Solactive Social Media Index which seeks to track the performance of companies involved in the social media industry including; social networking, file sharing, and other web-based media applications.

The ETF charges investors 65 basis points a year in fees and holds 30 stocks in its basket. AUM is pretty light at just about $11.4 million but the fund does trade decent volume, coming at just under 25,000 shares in an average session. This suggests relatively small bid ask spreads although SOCL’s spreads will still be higher than what many other investors are used to in more popular products (also see Inside The Cloud Computing ETF).

In terms of holdings, the product has a tilt towards large cap stocks as these securities make up slightly more than half of the portfolio. Next up is mid caps which make up another 36%, suggesting that the fund is definitely focused on larger securities than some of its counterparts.

For individual stocks, the portfolio is quite spread out from a geographic perspective, and to a lesser extent, across companies as well. LinkedIn takes the top spot at 11.8% of assets while Tencent Holdings from China is in second at 10.8% while Dena Co from Japan rounds out the top three at 9.4% of assets.

First Trust IPOX-100 ETF (FPX)

For a broad play on the IPO market—irrespective of industry—First Trust’s FPX is a solid pick. The ETF tracks the U.S. IPOX-100 Index which is a benchmark that looks to capture at least 85% of the total market capitalization created through U.S. IPO activity over the past four years.

The fund charges investors 60 basis points a year in fees for its services, holding roughly 100 stocks in its basket. Volume and AUM is pretty light, coming in at, respectively, 4,000 shares a day and $17 million, but it remains one of the only ways to play the broad IPO market in ETF form (see Ten Best New ETFs Of 2011).

As stated earlier, the fund looks at the broad IPO market and thus includes companies from a number of industries. Tech does account for the top sector at about 25% of assets, while consumer stocks take the next two sector spots at 23% for cyclicals and 18% for staples.

Thanks to this breakdown, the fund is dominated by large caps such as V, PM, and GM, which comprise nearly 27% of the total assets. A few smaller tech/internet companies do make their way into the fund, but their allocation is relatively minor in comparison to some of the other market segments. As a result, this fund is probably not appropriate for investors seeking targeted internet IPO exposure but instead is likely a better choice for investors who want broad access to the surging IPO market.

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