Twitter tweeted September 12 that it had filed its S-1 registration statement with the SEC. The filing signals its intention to go public. Whatever its IPO price you know it's going to be extremely popular with institutions and big-time investors alike.

Saudi billionaire Prince Alwaleed bin Talal, who owns $300 million of its stock, expects Twitter’s IPO later this year or early in 2014. He believes Twitter won't make the same mistakes Facebook (Nasdaq:FB) did and will price its stock realistically. Ordinary investors, who will have a hard time laying their hands on some of its IPO shares, are faced with the difficult decision of whether to purchase its stock once Twitter opens for trading.

Rather than stress about this, I’ve got three ways you can get in the back door.

Option One

If you're Michael Moe of San Francisco-based GSV Capital (Nasdaq:GSVC), this news is music to your ears. GSV owns 1.84 million common shares of the social media messaging service, which it paid $33 million for ($18 per share) over a 12-month period between Q3 2011 and the Q2 2012. Recently these shares have traded between $20 and $30 on the secondary market. At the high-end, GSV is sitting on a $22 million unrealized gain. Twitter, which represents 15% of its overall investment portfolio, is far more important to the company than Facebook was when it went public in May 2012, and that debacle cut GSV's market cap by more than half in little more than two months. Any hiccup in Twitter's IPO could drop GSV's stock to single digits.

This is definitely the riskiest of my three options but also likely provides the most upside.

Option Two

Jay Ritter is a University of Florida professor who specializes in IPOs. He speculates that Twitter will likely make available 20% of the shares sold for individual investors. You'll still have to fight like heck to get your paws on a few hundred shares. That's the hard way. The alternative is to buy an ETF that already holds social media stocks and will likely add Twitter to its holdings in due course once the IPOs priced and trading.

The second option is the First Trust US IPO Index Fund (NYSE:FPX), a semi-passive ETF that seeks to replicate the performance of the IPOX-100 US Index, which is 100 of the best performing and most liquid US public offerings in the IPOX Global Composite Index. Morningstar rates it five stars over the past five years out of 1299 funds. Its number one holding is Facebook with a weighting of 11.8%, followed by AbbVie (NYSE:ABBV), General Motors (NYSE:GM), Kinder Morgan (NYSE:KMI) and Phillips 66 (NYSE:PSX) rounding out the top five.

Should Twitter bust out of the gate both Facebook and the ETF would benefit from its success and ultimately, Twitter would become one of the 100. If it's a complete bust, your investment will still be very much intact because information technology stocks account for just 16% of its overall portfolio. With an annual expense ratio of 0.60%, you’re getting one of the best ETFs anywhere. Not to mention it's a far safer proposition.

Option Three

Social media use in the U.S. is high. Something like 78% of the population has internet access with 72% using social networking sites like Facebook, LinkedIn (Nasdaq:LNKD) and Google+. According to Pew Internet, Only 18% currently use Twitter although that’s growing rapidly. Internationally, where internet access isn’t quite as high, the opportunities are significant.

A second ETF making your life a little easier is the Global X Social Media Index ETF (NYSE:SOCL), a group of 28 holdings involved in the social media industry. In existence since November 2011, its performance has really taken off in the past year.

Assuming Twitter's IPO takes place without a hitch I'm sure it will be quickly added to the Solactive Social Media Index, which the ETF tracks. US stocks account for 49% of the portfolio’s assets with China another 28%. Of the two ETFs, this one has greater risk attached to it but also greater potential returns.

Bottom Line

On several occasions I've written about the silliness of investing in IPOs, especially those in the tech sector. Usually overhyped, they provide little for the average investor buying on the first day of trading, while the institutional investors who acquired shares in the IPO, exit quickly before you and I figure out we've been had.

Before Facebook went public a friend asked me if he should invest in the IPO. I told him to wait six months to a year in order to figure out where the company was headed, which turned out to be a reasonably sound piece of advice. Although my friend has yet to ask me about Twitter, if he does I'll tell him the same thing I told him about Facebook.

There's no rush.

Twitter may someday possess a $100 billion market cap, but that day isn't here just yet. Don't get caught up in the frenzy. Sit back and watch the action and over time you'll know if it's a worthwhile investment. Until then you have several thousand US stocks to consider instead. Or you can choose one of the three options provided above.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.
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Tickers in this Article: FB, GSVC, SVVC, LNKD, YELP, FPX, SOCL

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