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.)
Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Matthew McCall did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  2. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  3. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
  4. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  5. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  6. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
  7. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  8. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  9. Fundamental Analysis

    The World's Top 10 Entertainment Companies (CMCSA, CBS)

    Take a look at the world's top 10 entertainment companies, spanning the movie, television, cable television, gaming and streaming video sectors.
  10. Retirement

    Ipsy Review: Is It Worth It?

    Discover the history of ipsy, how much packages cost, options available for membership, major competition and what the future looks like for the company.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center