Is the craze for social media evaporating across the globe? At least, the poor performance by Global X Social Media Index ETF (SOCL) this year is giving such cues. In the year-to-date period, SOCL was off about 9.50% with the last one month being hardest hit when SOCL slumped more than 15%.
The reasons for this slide boils down to the social media sell-off in China as well as acute selling pressure witnessed in some of SOCL’s top holdings, like Facebook (FB - Free Report) and Twitter (TWTR).
Investors should note that SOCL has about half of its focus on the U.S., 25% of exposure in China and the remaining portfolio in the rest of the world. This clearly points to why any movement in the U.S. and China can make or break this social media ETF. Let’s delve into the matter in greater detail below:
What Happened in China?
Internet censorship has always been severe in China, resulting in a ban on some renowned social networking websites like FB, TWTR, YouTube, and FourSquare. These sites were identified as risks to state-controlled media. However, this is an old story.
The latest hazard was a possible bursting of the tech bubble in the U.S. in March which spilled over into the Asian tech sell-off as well. The Chinese Internet ETF has seen a spectacular run with CSI China Internet ETF (KWEB) gaining as much as 21% in the first two months of the year.
Though overall China ETFs started the year with sluggish trading, two other tech ETFs like Guggenheim China Technology ETF (CQQQ) and Global X China Technology ETF (QQQC) returned about 10.0%.
This splendid run-up had to end at some point as the Chinese Internet market was due for a correction. As a result, the largest holding of SOCL – Tencent – which accounts for about 13.08% of the basket, was down more than 17% since the beginning of February.
Its market capitalization plunged to $126 billion from $152 billion. Another Chinese company SINA Corp (SINA) – occupying 7.41% share of SOCL – tumbled 11.4% in the last one month (China Internet ETF: The Best Choice in the Space?).
Internet Stocks Losing Charm?
Russian Internet Company Yandex – accounting for 4% of SOCL’s share – lost about 11.2%, and the situation back home was even more vexing.
FB – having more than 12% share of SOCL – gave up 13.5% in price, LinkedIn having more than 8% share shed 12.8%, Zynga (ZNGA - Free Report) making up 5.5% of SOCL plummeted 26.6%, Yelp (YELP) contributor of 5.29% of the fund’s total assets plunged 28%, and TWTR having more than 4.5% focus slipped 19% over the past month.
In short, most components forming SOCL’s top-10 holdings experienced a bloodbath lately (read: Buy These 2 Tech ETFs on NASDAQ Sell-Off).
If this was not enough, recently, the Turkish government imposed a ban on Twitter. Should this trend continue, we may see more trouble for social media stocks in the near term, though its long-term potential looks promising.
This suggests that investors may want to pay close attention to the sole ETF tracking this space, especially when investors can easily use this deep plunge as a buying opportunity. Investors should keep in mind that SOCL delivered an impressive return of 42% over the past one-year period.
SOCL in Focus
This ETF offers the only pure play in the social media space and amassed $145 million in its asset base. The ETF charges 0.65% in fees and expenses. The product tracks the Solactive Social Media Index, holding 27 securities in the basket. In terms of country exposure, U.S. firms take more than half the portfolio, closely followed by China (26%) and Japan (11%).
After incurring a steep loss, the product was down only 0.52% last week. SOCL currently has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook (read: Facebook to Buy WhatsApp, 3 ETFs to Watch).
We do not think that the social media space is running out of favor. In fact, it sees solid potential ahead. But the recent slump will likely put the planned listing of Alibaba (Chinese Internet company) on the U.S. exchange in a tough spot (read: 4 ETFs to Tap on Upcoming Alibaba IPO).
Also, Weibo –the Chinese version of Twitter – seeks to raise $500 million in an initial public offering in the U.S., according to a recent regulatory filing. With investors in no mood to binge on social media, these IPOs might fail to succeed especially when Weibo’s parent company SINA is struggling under pressure.
If we rule out these near-term hurdles, SOCL might turn around, with investors’ interest on stock markets returning. Markets are hitting new highs lately. The relative strength index of SOCL is also hovering round 30, indicating that the fund has slipped to the oversold territory. The ETF’s Parabolic SAR is also higher than its current price, pointing to an entry point in the ETF for investors who aren’t afraid of taking on a little risk at this time.
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