ETFs to Watch After Facebook (FB) Shares Tank on Awful Q2 & Outlook


After the closing bell on Wednesday, Facebook (NASDAQ:FB) disappointed investors with second-quarter 2018 results. The social media giant missed the Zacks Consensus Estimate for the first time in nine quarters on earnings and in 13 quarters on revenues.

Congressional Hearings Likely Harden the Battle Lines Over FB Stock

Additionally, it provided a downbeat outlook for the second half of the year, suggesting that the slowdown in the revenue growth will prevail and expense would grow faster than revenues.

Q2 Results in Focus

Adjusted earnings per share came in at $1.74, a penny below the Zacks Consensus Estimate and increasing 32% from the year-ago earnings. Revenues soared 42% year over year to $13.2 billion and fell short of the estimated $13.42 billion. Both earnings and revenue growth slowed down from year-over-year growth of 63% and 49%, respectively, recorded in Q1.

Notably, mobile advertising revenues accounted for 91% of total advertising revenues, up from 87% in the year-ago quarter. Both daily and monthly active users grew 11% year over year to 1.47 billion and 2.23 billion, respectively. Growth in both user counts was down from 13% growth seen in Q1.

Chief Financial Officer David Wehner warned of continued deceleration in revenues in the second half of the year. He expects revenue growth rates to decline by high single-digit percentages sequentially in both the third and fourth quarters.

Facebook will continue to invest heavily in security and preventing abuse, video content, and long-term initiatives, which center on augmented and virtual reality, artificial intelligence and connectivity. As such, the company continues to expect operating expenses to increase 50-60% this year, higher than 32% recorded in 2017. This would have a significant impact on the company’s profitability.

Market Impact

Following the lackluster results, shares of FB tanked as much as 24% in aftermarket hours, erasing about $150 billion in its market cap but were down 20% at the close. Investors should note that Facebook hit a fresh high in yesterday’s trading session and is up 23.2% so far this year. If the same sluggish after-market performance continues in today trading session, the stock might slip into the red territory for the year.

Currently, Facebook has a Zacks Rank #3 (Hold) and a top Growth Score of A. It belongs to a top-ranked Zacks industry (top 40%).

ETFs to Watch

The terrible trading in the FB stock could also spread to the ETF world, especially funds having a larger allocation to the networking giant. As such, investors should pay close attention to the following ETFs:

ETFs to Watch After Facebook Shares Tank: Communication Services Select Sector SPDR (XLC)

The Communication Services Select Sector SPDR (NYSEARCA:XLC) debuted on Jun 18 to track the new communication services sector of the S&P 500 index and has since then accumulated $290.7 million.

It follows the Communication Services Select Sector Index and holds 26 stocks in its basket with Facebook occupying the top position with 21.6% share.

More than half of the portfolio is allocated to Internet software & services while media, diversified telecommunication services and software round off the next three. The product charges 15 bps in annual fees and trades in an average daily volume of 328,000 shares.

ETFs to Watch After Facebook Shares Tank: Global X Social Media Index ETF (SOCL)

The Global X Social Media Index ETF (NASDAQ:SOCL) is the pure play ETF in the global social media space and has amassed $187.7 million in its asset base.

The ETF charges 0.65% in annual fees, and sees moderate trading volumes of roughly 77,000 shares a day. The product tracks the Solactive Social Media Total Return Index, holding 35 securities in the basket.

Of these firms, Facebook takes the second spot, making up for 12% of assets. The fund has a Zacks ETF Rank #3 (Hold) with a High risk outlook.

ETFs to Watch After Facebook Shares Tank: Vanguard Communication Services ETF (VOX)

The Vanguard Communication Services ETF (NYSEARCA:VOX) also provides exposure to the new communication sector and currently tracks the MSCI US Investable Market Communication Services 25/50 Transition Index.

Holding 79 stocks in its basket, Facebook takes the fourth spot with 9.6% share. Integrated telecommunication services is the top sector accounting for 32.3% of the portfolio, while Internet software & services and alternative carriers round off the next two.

VOX has AUM of $1 billion and trades in good volume of 108,000 shares a day on average. It charges 10 bps in annual fees and has a Zacks ETF Rank #5 (Strong Sell) with a Medium risk outlook.

ETFs to Watch After Facebook Shares Tank: First Trust Dow Jones Internet Index Fund (FDN)

The First Trust Dow Jones Internet Index Fund (NYSEARCA:FDN) is one of the most popular and liquid ETFs in the broad technology space, with AUM of $9.6 billion and average daily volume of around 640,000 shares.

The fund follows the Dow Jones Internet Composite Index and holds 42 stocks in its basket. Expense ratio comes in at 0.53%. Facebook occupies the second position with 9.2% of assets.

While information technology makes up for a bigger chunk with 70.2% share, consumer discretionary accounts for 21% of the fund’s assets. The product has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.

ETFs to Watch After Facebook Shares Tank: iShares U.S. Technology ETF (IYW)

The iShares U.S. Technology ETF (NYSEARCA:IYW) tracks the Dow Jones US Technology Index, giving investors exposure to 136 technology stocks. The fund has AUM of $4.3 billion and charges 44 bps in fees and expenses.

Volume is good as it exchanges nearly 241,000 shares in hand a day. Facebook occupies the third position in the basket with 8.9% of assets.

More than half of the portfolio is allocated to software and services, while technology hardware and equipment accounts for 24.2% share. The fund has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

ETFs to Watch After Facebook Shares Tank: Invesco NASDAQ Internet ETF (PNQI)

The Invesco NASDAQ Internet ETF (NASDAQ:PNQI) follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. It holds about 95 stocks in its basket with AUM of $711.1 million, while charging 60 bps in fees per year.

The product trades in a lower volume of around 48,000 shares a day. Facebook takes the third spot with 8.5% allocation.

In terms of industrial exposure, Internet software and services makes up for 56.4% share in the basket, followed by Internet retail (33.4%). PNQI has a Zacks ETF Rank #1 with a High risk outlook.

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