ETF SOCL: golden hours ahead for social media companies

I rate Global X Social Media (NASDAQ: SOCL) a take. I like this ETF, but overall market conditions and very inconsistent investor attitudes towards the social media industry dampen my enthusiasm.

Strategy

Global X Social Media ETF follows Solactive Social Media Total Return Index. The ETF invests in the world’s most liquid social media companies that provide services such as social networking, file sharing and other web applications. The fund is not actively managed and investments are highly concentrated in one sector.

ETF Ratings:

• Attack/Defend: Attack

• Segment: New Growth

• Sub-segment: social media

• Risk (vs. S&P 500): Medium

Source: Modern Income Investor

Technical Notes*:

• Short term (next 3 months): C

• Long term (next 12 months): B

Source: Modern Income Investor

*Our assessment of reward potential versus risk taken.

(Rating scale: A = Excellent, B = Good, C = Fair D = Poor, F = Poor).

See the disclosures at the bottom of this report for a detailed description of MII’s proprietary technical rating system.

Maintenance analysis

SOCL is a highly targeted niche ETF that invests in social media companies around the world. The fund’s geographic exposure is heavily concentrated in Asia (61%), followed by North America (38%); it is much less exposed in Europe (1%). SOCL’s main holding is Tencent Holdings Ltd. (OTCPK: TCEHY) (14%). This is an advantage for any ETF, even focusing on one industry or theme like SOCL does. Although more than half of this ETF is invested in many of the biggest companies, a decent mix of mid-cap companies (23%) provides some balance.

Strengths

For many people, it’s hard to imagine life without social media. For others, it might be seen as a curse, not a blessing, so to speak. However, with a whole generation growing up with social networks (in the context of “digital natives”), the secular trend seems decided. According to the Global Social Media Market Report 2023:

Social media has grown from $193 billion in 2022 to $231 billion in 2023, a compound annual growth rate (CAGR) of over 19%. More importantly for forward-looking investors considering SOCL, the social media market is expected to reach $435 billion in 2027 at a CAGR of 17%.

If social media company earnings approach even such expectations, SOCL has the potential to be a long-term winner. This creates the kind of long-term tailwind potential for SOCL that few thematic or sector ETFs have, in my opinion.

Weaknesses

Concentration of funds is a double-edged sword. Focusing on a limited number of stocks can simplify an ETF’s “research” advantage to find out what you own compared to a stock ETF with hundreds or thousands of tiny positions. But this higher weighting in a small number of positions can be a game-changer (for better or worse) for a fund’s performance.

For example, shares of Meta Platforms (META) have fallen significantly since the company’s third quarter 2022 earnings announcement. fell 64%.

Opportunities

And therein lies the long-term opportunity with SOCL. While large market swings due to recession fears, rising borrowing costs and the impact of these two factors on social media companies could dominate the price performance of ETFs like SOCL in the medium term. , the growing acceptance of social media as an advertising platform is one of many opportunities that could lead to significantly higher interest in investing in an ETF focused on the social media industry.

SOCL’s positive long-term potential is compounded by its role as a gateway for investors into the virtual reality (VR) industry. The virtual reality market is expected to grow from around $7 billion in 2021 to over $50 billion by 2030. This represents an annual growth rate of around 25%. Although this industry has grown rapidly partly due to a lack of regulation, even though it is gradually maturing, virtual reality seems to be a promising technology that can change the world in the same way as social media.

This ETF shocked the system, given its 2022 performance and its dramatic impact on its assets under management. Just two years ago, SOCL was a $500 million ETF. Its AUM now sits below $140 million. This sharp decline in dollar assets and trading volume might have taken this ETF off the radar of some larger investors, who manage too much money on behalf of clients to be able to hold such a large position in SOCL as they would like.

But for retail investors investing smaller amounts of money than institutions, it could be a great long-term opportunity to invest in these types of stocks, with less risk associated with a single stock than owning them. directly. This could create a nice “fallen angel” situation for SOCL. But it will take time for the shock of 2022 to wear off.

Threats

One of the many threats to investing in a social media focused ETF includes competition from other social media companies, changes in regulations and user privacy laws, copyright infringement and cybersecurity risks. Additionally, data breaches, ideological polarization, and the potential for user burnout can negatively impact an investor’s return on investment.

But the main threat to the performance of this fund is the standard deviation of 34%. A standard deviation of 34% for SOCL over the past three years is relatively high, meaning the fund’s returns have been quite volatile and have deviated significantly from its average returns over the past three years.

conclusion

ETF Quality Opinion

SOCL is a compelling choice for investors looking to profit from the rapid growth of the social media industry. Such a single-industry ETF should be seen more as a piece of a portfolio puzzle and not the heart of it. As niche ETFs evolve, this one ranks higher, but with obvious risks, as noted above. I will be following this closely from now on.

ETF Investment Notice

Considering the positives and negatives noted above, I like this ETF. Overall, market conditions and very inconsistent investor attitudes towards this recently underperforming, but shocked, industry are dampening my enthusiasm. Thus, my current rating is an expectation. That said, once some of the “noise” has been eliminated and the stock market once again focuses on long-term growth potential, SOCL will likely be a candidate for an upgrade.