Facebook's IPO and You

 | Feb 01, 2012 | 3:00 PM EST
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This article originally appeared on ETF Profits earlier today.

Though dozens of companies go public every year, some obviously generate more interest than others. It seems as if the biggest initial public offering (IPO) of 2012 is shaping up to be that of the social media company Facebook (FB), which has held out as a private firm longer than many imagined it would, but now appears to be ready to submit its shares in a public offering. While Facebook is only a single stock, an IPO would have a big impact on a number of ETFs. So, today I'm sharing my thoughts on a wide range of topics related to the Facebook IPO and exchange-traded funds (ETFs), including those that might emerge as popular ways to play the social media space.

Facebook and Global X Social Media Index ETF

For investors searching the ETF universe for funds that will provide exposure to Facebook and companies engaged in similar industries, the Global X Social Media ETF (SOCL) stands out as the best "pure play" in this space, and does a remarkable job of maintaining focused exposure on social media stocks. Although the portfolio consists of some non-pure plays such as Google (GOOG), it is generally focused on companies that own and operate social networking sites.

For investors who believe the social media space is about to take off, SOCL could be a great way to establish exposure without the volatility that can come along with a single stock -- especially one with the buzz of Facebook that will likely see its share of ups and downs during its first few weeks as a public stock. But, a few basics need to be understood about the upcoming Facebook IPO and its impact on the SOCL.

Investing in SOCL will not allow investors to participate in the first day 'pop' that often accompanies IPOs. Per the rules of the underlying index, Facebook's stock will probably be added about five trading days after the IPO -- at which point it could be trading considerably higher or lower than its initial price. It should also be noted that the weight of FB in SOCL won't reflect its full $100 billion or so valuation; like most ETFs out there, SOCL is linked to a free float adjusted index. That means that only the portion of the company sold to the public, estimated to be about 10%, will be used in determining the weight afforded in the ETF. So, while FB will certainly be a major holding (and perhaps even the largest), it is unlikely to dominate this fund as it might if the entire market cap was a free float.

Will SOCL Get A Contact High?

As I've written previously when outlining my bullish take on SOCL, I think the potential exists for the Social Media ETF to get a boost from the proximity to the Facebook buzz even if FB isn't yet a component. The lofty valuations implied by the Facebook filing  and the general excitement over the aggressive growth plans for the company are sure to create excitement throughout the industry, which could push already-public social media stocks higher. In fact, SOCL has clearly already benefited from the excitement and increased attention paid to Facebook in recent days; through Tuesday's close the fund was up about 5% over the past week, compared to a slight decline for SPDR S&P 500 (SPY).

Expect SOCL to continue to outperform the broad market in the short term, as interest in this segment of the market continues to build and the transfer of Facebook's multiples to other stocks in the sector provides an increase in P/E ratios.

An ETF To Invest in for the Next Facebook

By the time most of us get an opportunity to establish an investment in Facebook, much of the company's appreciation will be in the rearview mirror. Though FB stock certainly has the potential for some significant long-term appreciation, the truly impressive gains were generated by the select group of investors who got in early -- when the valuation of the company was measured in millions and not billions.

Believe it or not, some ETPs exist that give investors the opportunity to gain indirect exposure to young, rapidly growing companies that have the potential to appreciate significantly. The ETRACS Wells Fargo Business Development Company ETN (BDCS) is linked to an index comprised of firms that essentially function as private equity shops, establishing various types of investments in young companies that need capital to grow. I like this ETN as a way to tap into an asset class that most investors don't ever come close to: young, promising firms that could end up being the next Twitter, Facebook, or Zynga (ZNGA).

Impact on QQQ

Finally, it's interesting to consider what impact the upcoming Facebook IPO will have on the PowerShares QQQ (QQQ), a popular tech-heavy benchmark that includes companies such as Apple (AAPL), Microsoft (MSFT), Oracle (ORCL), Google and Intel (INTC). If Facebook spurns the Nasdaq for the New York Stock Exchange (NYSE), that would leave the QQQs without a position in one of the largest tech companies in the world, potentially diminishing the prestige of the benchmark and the popularity of one of the largest ETFs in the world. 

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