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Facebook Shares Drop Despite Solid Q3: ETFs to Watch

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After the closing bell on Wednesday, Facebook FB reported robust third-quarter 2016 results topping our top and bottom line estimates on heavy dominance in the mobile advertising business. However, the social media giant warned that advertising revenue growth will slow down meaningfully in 2017 and spending will increase. This alarmed investors, sending FB shares down more than 8% in aftermarket hours.

Facebook Solid Q3 Results

Adjusted earnings per share (accounting for stock-based compensation) came in at 88 cents, crushing the Zacks Consensus Estimate by 11 cents. Revenues soared 56% year over year to $7.01 billion and edged past our estimate of $6.92 billion. Growing advertising revenue is the major reason for the robust performance.

Advertising revenues grew 59% year over year to $6.82 billion. Notably, mobile advertising revenues accounted for 84% of total advertising revenue, up from 78% in the year-ago quarter. The upward trend will likely continue as Facebook is expected to garner about $25.9 billion in global ad revenue this year, up from $17.1 billion last year according to eMarketer.
The company will continue to reap the benefits of a big push into video both on Facebook itself and on Instagram. It is the world's No. 2 digital ad publisher behind Alphabet (GOOGL - Free Report) (read: Top-Ranked ETFs to Buy on Alphabet's Robust Q3 Results).

Daily active users grew 17% year over year to 1.18 billion with 1.09 billion coming from mobile. Meanwhile, monthly active users grew 16% year over year to 1.79 billion, of whom mobile active users accounted for 1.66 billion, up 20%.

A Reason to Worry?

The company expects ad load (the ratio of ads to personal posts), one of the three key contributors to advertising revenue growth, to taper in the second half of 2017, resulting in slower ad revenue. In addition, CEO Mark Zuckerberg and CFO David Wehner both cautioned that 2017 would be a year of aggressive investment with a substantial increase in expenses as Facebook ramps up hiring.

Currently, Facebook has a Zacks Rank #4 (Sell) with a VGM Style Score of B and a dismal Zacks Industry Rank in the bottom 40%, suggesting that the some pain might be in store for the near term (see: all the Technology ETFs here).

ETFs in Focus

Given this, investors should pay close attention to the ETFs that have a larger allocation to this networking giant and grab any opportunity from a surge in the price of FB or avoid if the stock drags them down.

First Trust Dow Jones Internet Index FDN

This is one of the most popular and liquid ETFs in the broad technology space with AUM of $3.7 billion and average daily volume of around 472,000 shares. The fund follows the Dow Jones Internet Composite Index and holds 42 stocks in its basket. Expense ratio comes in at 0.54%. Facebook occupies the second position in the basket with 9.8% of assets. While information technology makes up for a bigger chunk of 70.5% share, consumer discretionary accounts for 21.5% of assets. The product has a Zacks ETF Rank of 2 or ‘Buy’ rating with a High risk outlook.

Global X Social Media Index ETF SOCL

This fund is the only pure play in the global social media space and has amassed $133 million in its asset base. The ETF charges 0.65% in annual fees, and sees moderate trading volumes of roughly 56,000 shares a day. The product tracks the Solactive Social Media Total Return Index, holding 34 securities in the basket. Of these firms, Facebook takes the top spot, making up roughly 10.3% of assets. In terms of country exposure, U.S. firms take half of the portfolio, closely followed by China (27%), Japan (8%) and Russia (6%). The fund has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (read: How Is Q3 Earnings Season Going for Social Media ETFs?).

iShares Dow Jones US Technology ETF IYW

This ETF tracks the Dow Jones US Technology Index, giving investors exposure to 141 technology stocks. The fund has AUM of $2.9 billion and charges 44 bps in fees and expenses. Volume is good as it exchanges nearly 242,000 shares in hand a day. Facebook occupies the third position in the basket with 8% of assets. More than half of the portfolio is allocated to software and services while technology hardware and equipment accounts for 26.7% share. The fund has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with a Medium risk outlook.

PowerShares Nasdaq Internet Portfolio PNQI

This fund follows the Nasdaq Internet Index, giving investors exposure to the broad Internet industry. The fund holds about 84 stocks in its basket with AUM of $291.7 million while charging 60 bps in fees per year. It trades in a light volume of around 19,000 shares a day. Facebook takes the second spot with an 8.1% allocation. In terms of industrial exposure, Internet software and services makes up for 59.5% share in the basket, followed by Internet retail (36.2%). PNQI has a Zacks ETF Rank of 3 with a High risk outlook (read: Catch Cloud with These ETFs).

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