After many months of hype and fanfare, social networking darling Facebook (Nasdaq: FB ) finally went public last week. Perhaps fittingly for a company that has grown in fits and starts, the IPO was not without its own fair share of mishaps and technical snafus at the opening of trading. Of course, with Facebook shares falling back below their IPO offer price just a few days later, the individual investors who missed out on the IPO are probably patting themselves on the back right now.
If you're among the many investors who missed out on the IPO and are thinking about buying shares of Facebook, you might want to let some of the dust settle first. It's almost never a good idea to rush into hot new trends, including one of the biggest, most hyped IPOs in U.S. history. But if you want to get in on the Facebook fad, there are other ways to play the game that aren't quite as risky.
Highly focused investing
Of course, Wall Street is not one to let the latest fad go unmonetized. So it shouldn't be surprising that investors who want to profit from the growing trend of social media can now do just that, in ETF format.
Last fall, the Global X Social Media Index ETF (NYSE: SOCL ) launched. The fund is designed to track the performance of companies involved in the social media industry both in the U.S and abroad. The fund's 0.65% price tag isn't cheap compared to most ETFs, but it's still less expensive than most actively managed technology funds. With just 31 holdings, this is a fairly concentrated fund, and since its inception last November, it has trailed the S&P 500. However, investors who insist on getting up close and personal with worldwide social media stocks might find this fund offers a slightly more diversified way to do so.
The bigger picture
But while I do agree that there is tremendous profit and opportunity yet to be tapped in the social media realm, I've never been a big advocate of funds that invest in narrow slices of the market. Such funds are typically more expensive and are riskier than broader-market offerings. If you really want to home in on the broader trends that are driving the rise of social media, you need to get your foot in the door of the broader information technology sector. That's where inexpensive, tech-focused exchange-traded funds come into play. These ETFs give you the option to boost your tech allocation without taking on a lot of company-specific risk.
Two of the cheapest options in this sector are the Vanguard Information Technology ETF (NYSE: VGT ) and the Technology Select Sector SPDR (NYSE: XLK ) , at 0.19% and 0.18%, respectively. Both funds focus primarily on large-cap blue chip names, with a smattering of midsize companies thrown into the mix. Tech giants like Apple, Google, and Microsoft are prominent in both funds' top holdings.
Sector funds like these are less risky than owning individual shares of a few specific tech companies or more narrowly focused funds like the Global X fund mentioned above, but they are still rather volatile compared to the broader market. For instance, both funds lost more than 40% of their value in 2008's bear market. Use ETFs like these to bump up your tech exposure on the margins, not to take huge bets with large portions of your portfolio.
Even investors who don't want sector-focused funds at all can still get in on the tech-fueled power of social media, Internet, and computer hardware and software firms. If you're looking for an even broader approach to tech investing, consider growth-oriented ETFs. These funds give you more diversification in multiple market segments while still maintaining a large allocation to the tech sector.
For example, the Vanguard Growth ETF (NYSE: VUG ) currently devotes 29.5% of its assets to the information technology sector and comes with a low 0.10% price tag. Likewise, for just 0.18% in expenses each year, the iShares S&P 500 Growth Index ETF offers a portfolio with one-quarter of its assets in tech. While you should have some more value-oriented or dividend-focused funds elsewhere in your portfolio, these two growth ETFs can play an important part in helping you capture the gains of social media and other info-tech companies.
Ultimately, time will tell whether Facebook turns out to be the steal of the century or a total flop. But you don't necessarily need to own that particular stock to benefit from the growth the tech sector is likely to see in the coming years. In this case, as in so many others, it may be better to avoid the fad and stick with the tried and true.
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