The recent announcement by Facebook that it has filed for an IPO that will likely begin trading in March has sparked a renewed interest in social media stocks and IPOs. Even though social media is a sector that is new, as far as public companies go, it did not stop the Global X Social Media ETF (Nasdaq:SOCL) from debuting last year. Over the last two weeks the ETF has been attracting big money in front of the Facebook launch later this year. (For more, see Earning Forecasts: A Primer.)
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Social Media
The 24% gain from the recent lows has sent SOCL to a new historic high. Some of the top holdings in the ETF are social media companies that went public in the last year. Three of the well-known names are Pandora Media (NYSE:P), LinkedIn (NYSE:LNKD), Groupon (Nasdaq:GRPN) and Zynga (Nasdaq: ZNGA).

Of the three, ZNGA has been garnering the most attention, after a run to a new all-time high following the Facebook news. The statement by Facebook alerted investors to the fact that the company generated 12% of its revenue from ZNGA products. Based on speculative valuations for Facebook, it could be deciphered that ZNGA was undervalued and the stock exploded higher on heavy volume.

Two other recent social media IPOs (P and GRPN) have not fared as well as ZNGA, as investors have questioned the true worth of the companies. The big question revolves around the competitors of the two companies, as well as determining if they are sustainable trends or simply fads.

Investors who are considering SOCL as an entry into the social media sector need to realize that China is a big factor in the performance of the ETF. Of the 26 stocks in the ETF, only 26% are based in the U.S., with China accounting for 35% and Japan another 25%. The ETF that charges a 0.65% annual fee is highly dependent on the performance of Asian stocks.

IPOs
An ETF that tracks an index that invests in IPOs has also performed well recently. The First Trust U.S. IPO ETF (ARCA:FPX) is up 13% in 2012 and is breaking out to its best level ever. The ETF is composed of 100 stocks that have gone public in the last 1000 days and is reallocated quarterly. Even though the ETF has been able to outpace the overall market in 2012, it should not be considered an investment into the social media sector. The top two holdings are Visa (NYSE:V) and Philip Morris (NYSE:PM) and they have zero exposure to the niche sector.

Social Media Vs. IPOs
Ahead of the Facebook launch, investors will be shuffling around looking for ways to play a potential rally in the shares without directly investing in the company's publicly traded stock. Both the social media and IPO ETFs will likely add Facebook to their portfolios in the coming months, but which is the best way to play this trend with ETFs?

I personally do not own shares of ETFs in either of the two niche sectors, nor do I plan to at this time. However, in the future I could see more potential in the social media sector once the hype comes back to a sustainable level. The IPO market will be more fickle, in my opinion, and I would rather concentrate on the niche social media sector than a broad-based IPO ETF. Investors must also realize the added risk with a specialized and concentrated ETF, such as SOCL versus FPX, when making the final decision. (For additional reading, check out 5 Must-Have Metrics For Value Investors.)

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At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

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