A Social Networking ETF? Don’t Click ‘Like’ Just Yet

Fund lacks big names, could be subject to big fees

   

Investors have been desperate in finding growth plays. And for this year, it has meant getting aggressive with IPOs, especially for social media operators like Pandora (NYSE:P), LinkedIn (NYSE:LNKD) and Zillow (NASDAQ:Z).

So it is no surprise that Wall Street has been working furiously to help investors get some of the action. For example, there have been a variety of interesting technology ETFs that have hit the markets. They include offerings like First Trust NASDAQ CEA Smartphone Index (NASDAQ:FONE) and ETRACS Internet IPO ETN (NYSE:EIPO).

But now, investors may have a chance to invest in an ETF based on social networking companies. It is called the Global X Social Media ETF, which should come to the markets within the next couple months.

The Global X fund is based on the soon-to-be-formed Solactive Social Media Index, an index that will be composed of many foreign-based social networking companies like Tencent, mixi, Gree and mail.ru. But there also are positions in U.S.-based operators, such as LinkdedIn and United Online (NASDAQ:UNTD).

While this seems like a good approach, the ETF still has some big problems facing it before launch. Of course, the social media ETF is lacking those types of companies investors really want, such as Zynga, Facebook and Twitter. The fact is they trade only on online markets like SharesPost and SecondMarket, which have little trading volume.

So, in a way, this fund is kind of like buying secondhand stocks. If you really want hot deals, maybe it is better to wait until they go public in the fall and early next year.

Also, the fees on niche ETFs can be hefty. Basically, it is more difficult to get economies of scale on funds with low asset bases (however, there has yet to be any disclosure on the fees for the planned ETF).

Finally, the benefits of diversification for the social meda ETF are really not that important. When playing a hot sector, why dilute it? Again, doesn’t it make sense to focus on the leaders instead? If you already have a diversified portfolio, then buying one or two social networking companies should not be a problem.

So while this planned Global X fund has lots of appeal — especially for those who want to get exposure to social networking — it probably is not the best option for investors.

Tom Taulli’s latest book is “All About Short Selling,” and he has an upcoming book called “All About Commodities.” You can find him at Twitter account @ttaulli.  He does not own a position in any of the stocks named here.

Editor’s Note: A previous version of this story was unclear on the fact that the social media ETF and related index have  not yet been finalized yet. The article has been edited throughout to clarify.


Article printed from InvestorPlace Media, http://investorplace.com/2011/08/social-networking-etf/.

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