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In Defense of the Social Media ETF


At low prices today, social media ETFs are great no-expiration-date call options on the future of social media.

By the end of this year, the number of new exchange-traded products that will have come to market in the U.S. could easily be around 300 if not higher. However, it's hard to imagine that even if the number of new ETFs to hit the market in 2011 was 1,000 (it won't be) that any of them will stir up the amount of controversy that the Global X Social Media ETF (SOCL) has.

Unwarranted controversy, I might add. The Global X Social Media ETF began trading on Tuesday Nov. 15, 2011. In four days, the ETF has endured a barrage of criticism ranging from the ETF's large weight to Chinese companies to the fact that the fund is just "off to slow start" in the eyes of some.

Regarding the "slow start" thesis, as of Thursday, SOCL had drawn in over $1.4 million in assets under management. That's an average of almost $500,000 per day over three trading days. No, that pace will not continue forever, but let's remember new ETF introductions should not be compared to IPOs for hot stocks. Many new ETFs take a while to mature and gain traction among investors.

At this point, the worst-case scenario for SOCL is that it stands an equal chance of disappearing as it does flourishing. However, four days into the ETF's existence, SOCL becoming the ETF equivalent of Jimmy Hoffa doesn't appear likely.

I also don't agree with dinging SOCL for its almost 37% weight to China. If China wasn't featured in the ETF at all, then naysayers would still be naysayers. Sure, social media started in the U.S. (I think), but it's a global phenomenon.

In an exclusive email exchange with Benzinga, Global X CEO Bruno del Amo had this to say about SOCL's non-U.S. exposure:

"This is a global fund; social media is expanding rapidly around the world, even though people often consider social media a U.S. phenomenon. China has 50% more internet users than the U.S., despite only having an internet penetration rate of around 37% compared to the U.S.'s 78%. This is part of the reason that China is represented significantly in the Fund, combined with the fact that the major U.S. social media companies are still private. This ETF is specifically designed to capture the global aspect of social media, which is often overlooked but clearly should not be ignored.

"The fact that Sina Corp., for example, has 140 million users and adding 20 million new users a month is perhaps more relevant than whether or not you have ever heard of them. Once larger U.S.-based social media companies IPO, such as Facebook, Twitter and Zynga, they will be added into the index 6 days after they go public, thus increasing the country weighting of the U.S. in the fund."

Not surprisingly, there have been comparisons to social media companies and the dot-com bubble of the late 1990s/early 2000s and this has turned into a critique of SOCL. Some social media companies are not currently profitable. Some are, including Facebook and Zynga.

"The social media companies of today are generating strong revenues from advertising and paying customers. Social media companies that are used by tens and hundreds of millions of people in Asia, such as DeNA and Tencent, are growing at an enormous rate. Currently over 80% of Fortune 100 companies and about 1/3 of small businesses utilize branded social media channels. What better way for advertisers to accurately target possible clients based on very specific profiles including: age, interests, profession, and location?," del Amo told Benzinga.

Let's remember something about Internet companies and profitability. Amazon (AMZN) went public in 1997, but didn't post its first net profit until 2002. The stock is up more than 11,700% since its IPO.

We're not saying SOCL has those type of returns ahead of it, but the new kid on the social media ETF is a far better concept than it's being given credit for. Maybe someday when Facebook and Zynga go public, those stocks will soar to Amazon or Apple (AAPL) price levels, making them unapproachable for most investors. If that happens, SOCL at less than $15 today is a steal and a great no expiration date call option on the future of social media...both in the U.S. and abroad.

Editor's Note: This content was originally published on by The ETF Professor.

Below, find some more great ETF and market content from Benzinga:

By Steven Anfield
By Matthew Kennedy
By The ETF Professor

Twitter: @Benzinga

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No positions in stocks mentioned.

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