Social media companies may seem like an obvious avenue for growth in relation to the larger technology sector. However, the highly competitive landscape often resulted in a growing chasm between big winners and downtrodden losers. The well-publicized success of Facebook Inc (NASDAQ:FB) has become the benchmark from which all others are measured.
This dichotomous industry is one reason why Global X Social Media Index ETF (NASDAQ:SOCL) has tread such a difficult path since inception. The internal tug of war between underlying components created constant volatility, uncertain trends and lackluster growth.
Nevertheless, 2016 has ushered in a fresh dose of optimism as this fund recently hit new all-time highs.
Getting to Know SOCL
SOCL was released in 2011 as an early entrant in the thematic ETF space. Its concentrated portfolio holds just 30 large and mid-cap social media stocks from around the globe. Companies are chosen and weighted according to their free float market capitalization.
This unique index construction methodology is one that gives greater weight to stocks with a high degree of their shares available to the public. As such, Twitter Inc (NYSE:TWTR) is the largest holding at 10.41% of the underlying assets in SOCL. Facebook is second, followed by Tencent Holdings Ltd (OTCMKTS:TCEHY) and LinkedIn Corporation (NYSE:LNKD). Together, these four stocks make up nearly 40% of the entire asset allocation.
The recent buyout offer for LNKD combined with the re-emergence of strength in TWTR are two key reasons why SOCL is having such a solid year. This fund is now up 18% year-to-date. By comparison, sector benchmark Technology SPDR (ETF) (NYSEARCA:XLK) is up just 10%.
Another large ETF that draws comparisons to SOCL is the First Trust Dow Jones Internet Index Fund (NYSEARCA:FDN), which shares many of the same top holdings.
Keep in mind that just because “most” ETFs are highly diversified vehicles doesn’t mean that niche themes can be lumped into the same stereotype. Specialized factions take on a more focused approach. This typically includes fewer holdings and larger position sizes. The end result is that certain stocks have an outsized pull on the overall performance of the fund.
It’s also worth noting that SOCL charges an annual expense ratio of 0.65%. While slightly on the high side, this modest premium is to be expected due to its unique focus.
The Bottom Line
A fund of this nature is likely to be used as more of a small tactical theme rather than a core holding. It can be used to focus the technology exposure in your ETF portfolio toward some of the largest social media companies in the world. This may be preferable to the hit-or-miss proposition of choosing individual stocks for some investors.
Nevertheless, it’s worth remembering that thematic ETFs often carry higher volatility and outsize fees relative to more diversified indices.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. To get more investor insights from FMD Capital, visit their blog. As of this writing, David Fabian was long TWTR.