Watching the run-up in social media stocks in 2016 is eerily reminiscent of the late 1990s with technology stocks trading at seemingly outrageous valuations, but it’s hardly “dejavu all over again.” Back then, software was king and Microsoft (MSFT) was the dominant tech company, but in 2016 the powerhouses are social media stocks with Facebook (FB) surging past Berkshire Hathaway (BRK.B)—the anti-Facebook—last July to a new high with a market cap of over $350 billion.
Even with performance like that, ETF users have yet to be convinced that the future is now with only one dedicated fund in the space—the Global X Social Media Index ETF (SOCL), which has a mere $68 million in assets after more than $43 million left the fund in the first seven months of 2016. This despite strongly outperforming both the tech sector and broader market.
But investors avoiding the fund because of the run-up in a few domestic stocks are missing out on what’s really been propelling SOCL higher this year.
Facebook and Twitter (TWTR) may have caught most of the headlines this year but they haven’t been the driving force behind SOCL’s returns. The fund was up just under 40% from its low on Feb. 11 to the end of July while FB and TWTR delivered more subdued returns of 21% and 16% respectively. What really helped get the fund over the finish line was merger mania with a large allocation to LinkedIn (LNKD) and smaller positions in Yahoo (YHOO) and a few other names that delivered for investors. It turns out the correction at the start of the year only encouraged mega-cap names to go hunting for bargains with the 50% premium Microsoft paid for LinkedIn still leaving the stock significantly below its 52-week high. Just the hint of buyout fever sent two smaller names in the portfolio, Groupon (GRPN) and Yelp (YELP), up more than 100% from SOCL’s lows.
If relying on mergers makes you anxious (and what investor isn’t these days) then take heart because buyout fever isn’t the only thing keeping SOCL in the black in 2016. Social media is all about making the world a smaller and more connected place and the fund reflects that by having a global focus with domestic equities making up slightly more than 50% of the fund with the rest being devoted to popular names in China, Russia and Japan, and with position weights rarely seen outside emerging market or country specific funds.
The largest international position is Tencent Holdings (TCEHY), which owns one of the most frequented search engines and social media platforms in Asia and is the second largest stock on the Hong Kong Exchange with a market cap of more than $220 billion. Tencent’s weighting in the portfolio, also 10%, is as large as it gets among ETFs outside dedicated to China or emerging market funds, while its domestic rivals, NetEase (NTES) and Weibo (WB), have smaller positions in the fund.
All three of those stocks have been strong performers over the last few months but not surprisingly it was a small Russian stock that has been the one juicing the returns for SOCL. The company in question is Russia’s largest search engine, Yandex NV (YNDX), which controls more than 60% of the web searches in its home markets. Yandex occupies a mere 5% of the fund although that’s still a larger allocation than you’ll find almost anywhere outside of a dedicated Russia fund and if investing with Putin makes you anxious, remember that risk and reward go hand in hand. Yandex has delivered a 71% return since SOCL’s 52 week-low to the end of July, only lagging behind those domestic stocks waiting for a buyout.
Maybe it’s time to click the “like” button on SOCL.