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ETFs to Add After Snapchat's Blockbuster IPO

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Snapchat, touted as the fastest-growing and hottest social media network, finally made a sizzling debut on the New York Stock Exchange under the symbol ‘SNAP’ on Thursday. The IPO was strongly greeted by investors as its shares soared as much as 53.2% during the first day of trading and were up 44% at the close.

The IPO pushed Snapchat’s market capitalization to nearly $34 billion, surpassing Twitter (TWTR - Free Report) which has a market capitalization of $11.3 billion. Snapchat has raised nearly $3.4 billion through the IPO offering of 200 million shares at $17 (read: ETFs in Focus as Snapchat Files for IPO).

Snapchat is the first tech IPO of the year and the largest since Alibaba BABA went public in 2014.

Snapchat: A Good Bet?

Snapchat, which came into existence in 2012, is a free mobile app with a broad reach among young millennials (born between 1981 and 2000) and Generation Z, the two valuable demographic groups for many businesses. It currently has 158 million active users globally, the majority of whom are millennials.

However, the user growth rate has slowed 82% after the launch of Instagram Stories in August. Additionally, losses widened to $514 million in 2016 from $373 million in 2015. As such, Snapchat warned over its profitability in the coming months amid stiff competition especially from Facebook’s Instagram (read: 4 Tech ETFs Set to Soar on Facebook's Stellar Q4 Results).

According to the IPO prospectus, the company’s revenues rose from $58.7 million in 2015 to $404.5 million in 2016. The trend is likely to continue given that the biggest opportunity lies in growing worldwide mobile advertising, which could reach $196 billion by 2020 from the current $66 billion.

As per eMarketer, Snapchat is poised for explosive growth in global ad revenues in the coming years. The company is expected to generate nearly $1 billion in ad revenues this year and $1.7 billion in the next, up from $344.7 million recorded in 2016. Notably, about 43% of ad revenues are derived from Discover Ads. As Snapchat continues to diversify and ramp up its ad products, the agency expects Stories to surpass Discover this year despite heavy competition. This suggests that the company is primed for solid future growth.

ETFs in Focus

The successful market debut of Snapchat could pave its entry into a number of ETFs in the coming days. Investors seeking to take advantage of growing investor appetite in the booming app company could play these ETFs in the months ahead.  

Global X Social Media Index ETF SOCL

This ETF targets the global social media space by tracking the Solactive Social Media Index. Holding 33 securities in its basket, it is heavily concentrated on the top three firms – Facebook, Tencent Holdings and Twitter – that collectively make up for 31.4% share. In terms of country exposure, U.S. firms take more than half of the portfolio, closely followed by China (29%) and Russia (8%). SOCL has so far amassed $84.7 million in its asset base. It charges 0.65% in fees and expenses and sees moderate volumes of roughly 91,000 shares a day.

Similar to Facebook and Twitter, Snapchat is expected to be included in SOCL holdings at the close of the fifth trading session following the IPO. The ETF currently has a Zacks ETF Rank of 3 or ‘Hold’ rating with a High risk outlook (read: Time to Sign Out of Social Media ETF on Twitter's Low Q4).

First Trust US Equity Opportunities ETF FPX

This ETF targets the U.S. IPO market and follows the IPOX-100 U.S. Index. It has accumulated $613.9 million in its asset base and charges 60 bps in fees a year. Volume is moderate as it exchanges about 59,000 shares in hand on average. In total, the fund holds 103 securities in its basket with the largest allocation going to The Kraft Heinz Company and AbbVie with over 9% share each. The product has a slight tilt toward information technology firms, followed by healthcare, consumer discretionary and consumer staples.

Since the ETF focuses on the 100 largest and most liquid U.S. IPOs, new companies can find entry into the fund’s holding after trading for a minimum of 100 days.

Renaissance IPO ETF IPO

This new fund also provides exposure to the largest and most liquid newly listed companies by tracking the Renaissance IPO Index. New companies seek inclusion on a ‘fast entry basis’ on the fifth day of trading.

Currently, Transunion TRU and First Data FDC take the top two spots at 8.4% each. Here again, technology stocks make up for more than one-third share while industrials and consumer staples round off the top three. The fund holds 46 stocks and has attracted $12.4 million in AUM. It trades in a light volume of less than 3,000 shares, probably ensuring additional cost beyond the expense ratio of 0.60% (read: How to Play Hot Tech IPOs With ETFs).

Sprott Buzz Social Media Insights ETF BUZ

This ETF has accumulated $5.2 million in AUM since its debut last April and targets the most talked about stocks on the web across the social media landscape. It holds a well-diversified portfolio of 77 stocks with none holding more than 3.23% of assets. The product is a bit costly, charging 75 bps in annual fees and trades in a paltry volume of under 1000 shares.

The stocks found a position in the fund’s holding based on the filtration of over 50 million unique stock-specific data points from social media comments, news articles and blog posts through analytics model, which utilizes Natural Language Processing Algorithms and Artificial Intelligence Applications. The holdings are adjusted each month.

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