Social Media ETF – There Can Be Only ONE…

by ETF Base on August 22, 2011

The Social Media ETF is here, or so it’s called.  Recently, Global X filed with the SEC (source) to launch a Social Media ETF which will be based on the The Solactive Social Media Index which is representative of business ventures involved social networking, file sharing, and other online media applications. The holdings will be screened for liquidity and weighted according to modified free-float market capitalization. The index is maintained by Structured Solutions AG.

With a limited field of what many would refer to as true social media since we have yet to see IPOs from the likes of Facebook and Groupon (GRPN), some of the popular publicly traded companies that would be representative of the fund would include LinkedIn (LNKD) and Pandora (P).  There will be obvious overlap with other similarly-themed tech ETFs that have launched recently like the Cloud Computing ETF and others.

Here’s Why the Social Media Bubble is Sure to Burst

  • The Can Be Only One – As we’ve been seeing in the Tech space, there is only one HUGE company that makes it in each space, but the market’s pricing in hundreds of companies as if they will be the next Facebook, Zynga or Pandora.  There simply can’t be 10 of each in the #1 or #2 slot, which is where the lionshare of the revenues (and any hope of profit) will reside.  Therefore, this relegates dozens of companies that private investors have bid up into the stratosphere as doomed to failure.  Perfect timing for an IPO and a Social Media ETF!
  • Headline Hype – Just like what we saw during the internet bubble in the late 90s, retail investors start to associate a “cool” and popular, growing company as a great investment, regardless of how outrageous the valuation is.  We should hardly be surprised if and when Facebook finally goes public if Americans that have never bought an individual stock open a trading account just to buy shares in the company they spend hours per day on.  Over the years, we’ve seen inexperienced retail investors trying to invest in hedge funds, rental real estate, life settlements, and to date, they’ve lucked out only with precious metals investments.  But the story always ends the same.
  • No REAL Value Created – This is the first major bubble in history for which there will be nothing left behind when it bursts.  See, during the housing bubble, there were millions of homes built that are now sitting vacant or are occupied by squatters waiting to be evicted.  While the impact to the economy has been immense, at least these properties have “value”.  Even though there is negative equity in millions of homes and the books of lending institutions will look much worse when these losses are realized, there is still residual value in land, housing and rental units.  The internet bubble?  While there were many companies selling at wild valuations that never saw a profit, the internet bubble DID leave behind value.  We saw major infrastructure build-outs in high speed cable, increased processor/data speeds, increased coverage, entire new industries were borne.  However, with this bubble?  It’s created no residual value.  The survivors will continue to prosper, but there’s no residual value left in an imploded social media bubble.  No physical assets, no infrastructure, no jobs.  This will end badly.

No word yet on expense ratios or a ticker symbol, but we all knew it was a matter of time before the social media meme translated into an ETF.

Disclosure: No holdings in any investments cited in this article.

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