Young and profit-less Twitter is a risky investment. At $42.90 a share it’s not a particularly cheap investment either. ETF issuer Global X Funds is betting it can mitigate this risk by selling you not only Twitter, but a whole bundle of tech stocks.
Global X started its Social Media Index ETF in November 2011. In two years the fund has grown from $1.5 million in assets to $106 million. It now trades for around $18.50 a share. That is up 26% from its original price — and 55% year-over-year.
Although Twitter will not be added until later this week, the 27 stock fund has benefited from the excitement surrounding the micro-blog’s initial public offering, as well as from improving industry performance. Jay Jacobs, Global X Funds research analyst, believes “the social media industry is coming into a new level of maturity.”
The fund grew some when Facebook FB -1.01% went public in May 2012 but failed to catch on. This time last year the fund had just $12.6 million in assets under management. Jacobs posits, “a lot of people were really waiting for the full offerings of the social media industry.” Now that Twitter is public and Facebook’s share price is up, investors are flocking to the ETF. Assets have grown 430% from $20 million in August and the Twitter IPO brought the fund’s highest volume day yet with 600,000 shares traded.
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Twitter will likely be added after trading Wednesday, at the close of a five day waiting period Global X uses to let IPO volatility cool down. Once added Jacobs expects Twitter to make up around 5% of the fund’s holdings.
Stocks’ weight in the fund is determined using free-float market cap. Only 12% of Twitter’s shares are available for trade, so its $16.8 billion free-float market cap won’t lead to a huge position for the fund (compared with Facebook’s $69.7 billion). But this low float model has been typical for social media companies. Facebook floated about 20% in its IPO (currently 61% of shares are available to trade.)
Tencent Holdings is currently the largest position in the fund, making up 10% of net assets. The Chinese internet giant is followed by Facebook at 9.6%, LinkedIn LNKD -0.16% at 9.5% and China’s Sina Corp at 9.2%.
The fund uses a broad definition of social media, that includes social networking, as well as file sharing and web based media. So holdings include giants typically thought of as social — Facebook, LinkedIn — as well as daily deal site Groupon GRPN -4.3%, consumer review sites like Angie’s List ANGI -1.3% or Yelp YELP -2.41% and even music streaming platform Pandora Media P -1.52%.
“Overall, if you look at all those websites,” says Jacobs, “the same factors the will make Twitter succeed and Facebook succeed will also help Pandora.” Increased internet engagement as well as movement from desktop to mobile has benefited the companies included in the fund, he says.
Looking ahead Global X is optimistic about high growth in the young industry.
“For a company like Twitter there’s a lot of ways it can sustain that growth,” says Jacobs noting that the company doubled its third quarter revenue from 2012 to 2013. “Right now they only have 200 or 250 million users so they have the whole world to expand into. There are a lot of things in the advertising space they haven’t tried yet. People have been talking about them selling data. They haven’t really tried the hyperlocal advertising yet.” With 1.2 billion users Facebook has less opportunity for expansion.
Jacobs is also pleased with Twitter’s performance in its first days of trading. “Obviously the IPO went really well.” He points to interest during the road show and the eventual pricing above the target range. “I think they still purposely priced it under what they expected, really in reaction to what we saw with Facebook last year.” He sees the 73% first day pop as great marketing, and says the slight drop off in the days since is to be expected. Pandora was down 20% after its first five trading days; Yelp 18%.
Not everyone, however, is thrilled with Twitter or the broader industry. FORBES contributor Jesse Colombo recently argued that Twitter’s IPO is further evidence of tech bubble. He writes,
Though investors are betting that Twitter will grow into its valuation, I strongly believe that they have gotten ahead of themselves and should be assigning a far more conservative valuation to a speculative investment like this. Even if Twitter becomes a profitable company, most of their future growth is likely already priced into the stock, which means that even the slightest disappointment will send it tumbling.”
[Update: This story has been updated to reflect that Facebook floated about 20% of shares at IPO.]