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Are FB & EU Casting Cloud Over Silicon Valley and These ETFs?

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The double whammy of data breach and the European Union’s new tax plan thrashed the big tech names this week. Tech-heavy Nasdaq-100-based fund PowerShares QQQ ETF (QQQ - Free Report) has lost about 2.1% so far this year (as of Mar 19, 2018), while Technology Select Sector SPDR ETF (XLK - Free Report) shed about 2% on the day.

Inside Data Breach

Reports of Cambridge Analytica, a data firm that was associated with President Trump in the 2016 elections, gaining unauthorized access to 50 million Facebook (FB - Free Report) user accounts in one of its largest breaches yet hit the social-media giant hard on Monday. Facebook is now under the scrutiny of U.S. Congress and facing questions about the safety of personal data.

The allegation came as a huge blow to the company at a time when it is already under pressure from reports of “Russians' use of Facebook tools to sway American voters with "fake news" posts before and after the 2016 U.S. elections.”

While it is unclear if Republicans would take steps against Facebook and Cambridge Analytica, the calls point at growing ‘bipartisan concern’ in Washington over Internet firms’ fair execution of user data.

Facebook shares declined as much as 6.8% on Monday on four times higher the regular average volume. This marks the largest intraday decline since August 2015 and resulted in about nearly $35 billion of market-cap loss. FB shares lost another 1.5% after hours.

Europe’s Planned Revenue Tax on Digital Companies

The European Commission is likely to target Silicon Valley’s tech titans with a plan to refurbish how these are taxed in the foreign region. The bloc reportedly believes that tech companies contribute less than what these should to public funds. The EU estimated that an average effective tax rate of digital businesses is only 9.5% against 23.3% paid by traditional businesses.

Per the likely rule, big tech companies operating in the European Union, such as Alphabet Inc. L) or Twitter Inc. (TWTR - Free Report) , may be subject to a 3% tax on their gross revenues based on where they derive revenues from instead of where there are headquartered. Many tech giants are based out of low tax-charging countries like Luxembourg or Ireland.

According to the latest draft, this new tax will be imposed on tech companies with global revenues of more than €750 million ($920 million) and total taxable annual revenues from offering digital services in the EU of more than €50 million. The plan is likely to be proposed on Mar 21.

Stocks & ETFs Under Pressure

Since companies like Facebook, Google, Amazon and Twitter are likely to come under pressure from the latest turn of events, cautious investors may shy away from ETFs heavy on these stocks in the near term. Below we highlight some of these funds.

Global X Social Media ETF SOCL

The fund has 14.57% weight in Twitter, 8.4% in Facebook and 4.4% focus on Google.

PowerShares NASDAQ Internet ETF (PNQI - Free Report)

Amazon is the second holding of the fund with about 8.8% focus while Google, Facebook and Twitter have around 7.3%, 6.9% and 3.4% weight, respectively (read: Best Performing ETFs of 9-Year Bull Run).

First Trust Dow Jones Internet ETF (FDN - Free Report)

Amazon, Facebook, Alphabet and Twitter take about 26% of the fund together.

iShares US Technology ETF (IYW - Free Report)

Apple, Microsoft, Facebook, Alphabet occupy the top five positions of the fund and take about 50% of it (read: Invest Like Warren Buffett With These ETFs).

VanEck Vectors Retail ETF (RTH - Free Report)

With Amazon taking the about 24% of the fund, EU’s new tax plan puts this fund in focus (read: ETFs Face-Off as Amazon Races to Surpass Microsoft).

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