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Exchange-traded funds have become immensely powerful players in the investing world. With more than $1 trillion under management, ETFs can make or break stocks simply by whether they're included among or excluded from their holdings -- and they often both follow and support popular investing trends with new offerings designed to cash in on the hottest stocks.
Today's release of the Global X Social Media ETF is a great example of the ETF phenomenon at work. With the ETF, investors will be able to get one-stop shopping on many of the companies that have had highly watched initial public offerings in the past year -- along with some other stocks that are extremely difficult for U.S. investors to get their hands on.
Like this ETF
With one of the primary purposes of exchange-traded funds being to let investors gain diversified exposure to a sector of the market, the Global X ETF does a good job of giving its shareholders all of the hottest social media companies -- or at least the ones that are already trading on the public markets.
Groupon (Nasdaq: GRPN ) , Pandora Media (NYSE: P ) , and LinkedIn (NYSE: LNKD ) will be just three of the 25 stocks that you'll find in the social media ETF when it becomes available to shareholders. With Groupon and Pandora getting 4.75% weightings and LinkedIn weighing in at 3.5%, the ETF will only have about a quarter of its assets in U.S. stocks -- at least for now.
Somewhat surprisingly, the social media ETF will start out having a distinctly international flavor to it. The fund has a 37% exposure to China, with NetEase (Nasdaq: NTES ) , Sina (Nasdaq: SINA ) , and Tencent Holdings each getting 10% weights. Japanese stocks make up nearly 20%, and you'll find a variety of Eurasian countries with a presence in the portfolio.
Waiting for IPO
That's likely to change, however, once a broader range of social media companies becomes available to public investors. In particular, Facebook, Twitter, and Zynga could all end up representing sizable portions of the ETF.
The lack of special access to pre-IPO shares, however, marks one downside of the fund. The ETF isn't allowed to invest in existing social media companies until their stock goes public. So if future social media IPOs follow the pattern that LinkedIn and Groupon have set, then an ETF bound by rules that require it to buy shares as soon as a stock is added to its tracking index could have to pay top-dollar for shares immediately after an IPO -- only to see those shares trade well below opening-day trading levels in the weeks and months following the public offering.
Should you buy it?
Few issues are more contentious right now than whether social media companies will make good long-term investments. Like young Internet companies in the late 1990s, today's social media companies are hard to value using traditional valuation measures and lack the track records to give investors certainty about getting a return on their investments.
But the advantage of an ETF is that you don't have to guess which stock will emerge from the fray victorious. Just as Amazon.com (Nasdaq: AMZN ) and priceline.com (Nasdaq: PCLN ) escaped the graveyard of countless dot-com peers 10 years ago, so too will some social media companies survive the inevitable shakeout that will come -- whether it's next month or several years down the line. How well the Global X ETF does depends on how smart its index provider proves in choosing new companies to add and the weightings it assigns to them.
In the end, whether the Global X Social Media ETF deserves a place in your portfolio depends most on your temperament as an investor. If you prefer solid, stable stocks with long histories of reliable performance, then none of the companies in this ETF is likely to strike you the right way. But for growth investors who are used to getting in on promising trends as early as possible, the Global X ETF might open the gateway to simpler high-growth investing in social media.
ETFs are a great tool that can point you to profits. But you have to pick the right funds. The Motley Fool's free special report on ETFs reveals three ETFs that could truly soar in the next recovery -- but don't wait long.