A Safer Way to Invest in High-Potential Social Media Stocks

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some social media stocks to your portfolio, the Global X Social Media Index ETF (NASDAQ: SOCL  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The Global X ETF's expense ratio -- its annual fee -- is 0.65 %. The fund is rather small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF is too young to have a sufficient track record  to assess. And as with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why social media?
It's hard to imagine a world without social media, now that we're able to interact with one another online. And since the social media arena is so young, and the world's population is still developing and coming online, there's much growth potential.

More than a handful of social media companies  had strong performances over the past year, but plenty did not, reminding us why the basket-of-stocks approach can be effective, reducing some risk.

United Online (NASDAQ: UNTD  ) , for example, surged 25%, encompassing sites such as the FTD flower and gifts business, Classmates, Memory Lane, StayFriends, and Trombi. Its communications division includes the NetZero and Juno brands. Many like the company's fat dividend yield, which was recently around 6.3%, but with it paying out just about all it makes, the dividend isn't likely to rise much soon, and may even be cut. In its last quarter, the company topped  expectations for earnings and revenue, and it plans to spin off its FTD floral network.

Many are excited about China's dot-com businesses, as its huge and growing middle class offers much growth potential, particularly via the spread  of smartphones. The country's Internet users numbered 538 million in 2012 per the China Internet Network Information Center, with penetration at only 40%. That spells massive room for growth. Another estimate is that with more than a billion Chinese already using mobile phones, Internet users should number 800 million by 2015. Renren (NYSE: RENN  ) , often referred to as China's Facebook, is one possible beneficiary here, and it shed 18% over the past year. SINA (NASDAQ: SINA  ) , down 13%, is operating a Twitter-like service and offers micro-blogging as well. Youku Todou (NYSE: YOKU  ) , up 2%, offers Internet television and video content.

These are all promising companies, but they face challenges, too, such as censorship in China and the need to invest heavily in their growth. There's also a threat of greater competition, potentially by their bigger, more established American rivals. In recent months, Renren has seen its display advertising revenue shrink and more money come from online gaming ventures. Youku Todou has been smiled upon by some Wall Street analysts, but it needs to keep costs under control. SINA and the other companies are also at the mercy of China's regulations, such as one proposed to require social media users to register with their real names.

The big picture
Demand for social media isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.


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  • Report this Comment On January 24, 2013, at 10:23 AM, BabyBeluga2 wrote:

    It should be noted that there are benefits of real name registration for the online advertisers that will provide revenue for Chinese social media companies. As for censorship, it is a way of life in China. Chinese companies navigate censorship rules the same way they navigate other onerous government regulations. American investors should not overreact to censorship stories in the Western media--the full story is not usually told there.

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