SOCL: A Social Media ETF To Take Advantage Of A Digital Advertising World

SOCL: A Social Media ETF To Take Advantage Of A Digital Advertising World

Introduction

The Global X Social Media ETF (SOCL) tracks a market-cap weighted index of social media companies. The ETF has outperformed even the NASDAQ at times. Digital advertising has greatly expanded over the last few years and is projected to grow at over 15% per year for nearly a decade. This is a huge opportunity for the companies in this industry to establish themselves as key players and, ultimately, capture those advertising dollars. SOCL may just be the easiest way to gain broad exposure to global social media companies.

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Source: Unsplash

The Social Media Advertising Industry

Most social media platforms derive revenue from advertising. According to GlobeNewswire, the global social media advertising industry is estimated at $85 billion USD in 2020 and should grow to $248 billion USD by 2027, for a CAGR of 16.5%. That is some impressive growth, especially considering the growth the industry has already experienced over the last decade. That said, I can’t help but feel GlobeNewswire is underestimating the size of the market, given Facebook (FB) itself will likely do $83 billion or more in revenue in 2020.

Advertising overall has taken a hit in 2020, spurred by the COVID-19 pandemic. However, social media companies, for the most part, have not only managed to maintain advertising revenue but many have even increased advertising revenue this year, due to two main tailwinds, one short term and the other long term.

The first tailwind has been a shorter-term shift in consumer preferences to shop online during the pandemic for obvious reasons. This has benefitted social media companies as well as e-commerce companies massively. The second tailwind is the overall shift in advertising dollars to digital platforms over more traditional advertising media. I only see this trend continuing as more and more advertisers recognize the value and effectiveness of digital advertising campaigns.

An ETF To Capitalize On The Global Shift

SOCL seems to be the only US-based ETF that focuses exclusively on global social media companies. While the majority of the fund’s holdings are in the US, the fund has also dedicated a considerable amount to other geographies as well.

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Source: ETF.com SOCL Overview

The US makes up a little more than 55% of the fund. The second-largest region is Hong Kong with around 15% weighting, while Korea makes up the third-largest region coming in at around 10% of the fund. China is also right there at around 10%. Various other European and Asian countries round out the top 10 regions.

As for actual holdings, SOCL is a fairly concentrated fund with just 40 total holdings. The top 10 make up over two-thirds of the fund’s total assets.

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Source: ETF.com SOCL Overview

Surprisingly, Snap (SNAP) is currently the fund’s largest holding. This is strange considering Snap’s market cap is less than one-tenth that of Facebook, and the index tracked by SOCL is a market-cap weighted index. Normally, I’d attribute such a large holding to be due to strong performance from that specific stock, causing it to outgrow the other holdings in the fund and become a top holding. Snap has certainly performed extremely well over the last year or so, but that does not appear to be the case here as SOCL rebalances twice per year on the last business day of April and October. Snap has performed well since the last business day of October, but nowhere near the performance that would be required to see it grow from say a 5% holding to 10%.

ChartData by YCharts

This tells me the fund managers are making an oversized bet on Snap. This is definitely something investors should consider before purchasing this fund. Overall, the other holdings appear more balanced.

Final Stats And Performance

SOCL charges an expense ratio of 0.65%. While that certainly isn’t the lowest out there, it’s also not irregularly high for a technology or digital platform ETF. Comparing the performance of the fund to the Invesco NASDAQ 100 ETF (QQQ) demonstrates the fund’s ability to put up solid performance numbers on multiple time frames.

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Source: ETF.com QQQ vs. SOCL Comparison Tool

Social media companies have done shockingly well this year so far with SOCL posting a 71.56% return year to date. With less than a month to go, it’s pretty safe at this point to say that SOCL is likely to have put up better performance than the Nasdaq in 2020. On a three-year timeframe though, it is the Nasdaq ETF that outperforms by about 4 percentage points on average per year. 5-year performance once again goes in the favour of SOCL.

While it’s impossible to predict returns going forward, I personally think these social media companies will continue to make strides in the advertising industry and they should continue to capture more advertising dollar market share with each year that passes for quite some time.

Risks

Like any investment, there are always risks. The key risks I’ve identified for SOCL include the following:

  • Companies like Facebook have come into scrutiny over various business practices over the last few years, including new antitrust lawsuits on December 9, 2020.
  • Ironically, despite lawsuits against Facebook claiming they have a monopoly, I would argue that the industry is highly competitive. All these social media platforms are fighting for as much of their user’s attention as possible.
  • Many social media stocks are not yet profitable or cash flow positive.
  • Some investors may have ethical concerns over how some social media companies collect data and target individuals.

Conclusion

SOCL’s performance has been strong, certainly enough to justify its relatively high expense ratio. Going forward, I would expect solid performance to continue on a longer-term basis as more advertising dollars globally shift to digital and social media. SOCL gives investors broad exposure to the top companies in the social media space.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Credit: SeekingAlpha

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