Nutrisystem (NTRI) primarily makes money selling frozen meals to people trying to lose weight. That’s not the sort of business model usually labeled “social media.”
Yet there Nutrisystem is, in the stock holdings of the Global X Social Media Index ETF (SOCL). The exchange-traded fund, started Nov. 15, tries to capture the craze for all things social media. Whether it succeeds is open for discussion.
“It’s a very odd assortment of stocks,” says Gregory Peterson, director of investment research at Ballentine Partners. Unsophisticated investors, excited about social media or Facebook’s upcoming initial public offering, might not know what they’re getting into, he warns.
Investors obviously have their eye on social media. Unfortunately, the social media companies that are most in the news–Facebook and Twitter–aren’t yet public. Into this vacuum comes SOCL, with a very expansive definition of “social media” indeed. When the fund was launched last year, CNN Money’s Hiba Yousuf called it “a gimmick.” Things haven’t changed a lot since.
To the right, you can see the five biggest holdings in the fund’s portfolio. Not exactly what you might expect from a fund whose performance is supposed to track the social media business. Like almost all exchange-traded funds, this one’s holdings are based on an index, but it’s an index that exists largely to serve the needs of the fund. Global X Funds came up with the idea for SOCL, then asked index provider Structured Solutions to come up with the stocks that fit the bill. That’s a common procedure for ETFs–you can read more about that in our ETF special report.
The notion of a “social media index” might lead investors who’ve been reading about Facebook, LinkedIn and Groupon to expect a balanced sampling of the emerging industry. Indeed, on Feb. 3, the day after Facebook filed to go public, 224,000 shares of SOCL changed hands, more than 17 times its average volume at that point. What those investors are getting, though, isn’t at all close to that.
The top four companies make up 40 percent of the index and the resulting ETF. Four of the top five are China-based (Gree is based in Japan). Chinese stocks make up 41 percent of the fund, Japanese and Russian ones another 30 percent. That leaves U.S. stocks such as LinkedIn (LNKD), Google (GOOG), Zynga (ZNGA), Pandora Media (P) and Groupon (GRPN) with 25 percent of the index.
“This could easily be categorized as an international Internet ETF as opposed to a social media ETF,” says Scott Kessler, a technology analyst at S&P Capital IQ.
ETF provider Global X Funds defends SOCL, and especially its foreign flavor. “A lot of people in the U.S. consider [social media] a U.S. phenomenon,” says Global X research analyst Alex Ashby. In fact, the industry is global, and, without this ETF, “a lot of these companies may not be easy for U.S. investors to get access to, or they may not be aware of them.”
That might be true, but it’s not clear that even after searching the whole world Global X and Structured Solutions have really managed to find enough true social media companies to fill out the fund. The bulk of the stocks in the ETF are designated “pure social media companies” by the ETF’s guidelines. The definition of “pure” is broad, however. A “significant part” of a company’s revenues may come from not just social networking but also “file sharing and other web-based media applications.”
Many of these stocks are large diversified Internet companies with social media offerings. Those include the fund’s top holding, China-based Sina Corp (SINA). Or Google, which comes in at number 11, and makes up 4.1 percent of the fund. That’s a company with a lot of different lines of business. And social media (hello, Google+!) is definitely not the biggest.
Others, such as Zynga or Japan’s Nexon (3659) are specialists in online games. S&P’s Kessler isn’t sure if all these really qualify as social media in the same way Facebook does. “You can have a business with social media offerings, but is it a social media company?” he asks.
Which brings us back to Nutrisystem. It does bill itself as an online weight loss community. Along with Google and the Russian web site Yandex (YNDX), it is included in SOCL as a company that is expected to generate significant revenues from social media in the future. Stocks in that category are each capped at 4.75 percent of holdings, and Nutrisystem ends up with a 1.4 percent share.
The real question isn’t whether SOCL adequately captures the social media trend. It’s whether investors should be placing a bet on a concept as slippery and open to interpretation as social media in the first place. If you really want to profit from, say, increased Internet usage, you might try a much broader fund like the Vanguard Information Technology ETF, Kessler notes. Its assets are spread over 422 tech stocks — 392 more than SOCL — while charging an expense ratio that’s 62 percent cheaper.
The comparison bolsters an argument advisers frequently make about ETFs: They’re great as low-cost ways to get broad exposure. However, investors are likely to be unsatisfied when ETF providers look for cute and clever ways to bottle up the flavor of the month.