Facebook has been the focus of equity markets during the past month. Prior to launch, anticipation of the initial public offering (IPO) was virtually euphoric. However, after the stock was issued at $38 (U.S.) per share, euphoria quickly turned to confusion and ultimately to disappointment when its share price fell to as low as $30.94 last week.
Why the initial strong interest prior to the IPO? Facebook is the elephant in the social media sector and the social media sector is one of the fastest growth industries in the world. Facebook already has attracted over 900 million subscribers.
Investors have been looking for a way to invest in the social media sector without holding individual stock with high volatility. And, yes, there's an "ETF" for that. Last November Global X launched the Global X Social Media Ind. ETF . The fund tracks the equity performance of the largest and most liquid companies involved in the social media industry, including companies that provide social networking, file sharing and other web-based media applications. The fund does not hold Facebook, at least not yet.
The ETF owns a diversified portfolio of 30 holdings in the sector. Top ten holdings in order of value in the portfolio are LinkedIn Corp. , Tencent Holdings, SINA Corp. , DeNA Co. Ltd., Gree Inc., NEXON Co. Ltd., Mair.ru Group GDR, NetEase Inc. , ADR, Yandex N.V. and Google, Inc. Class A .
This ETF is not for the faint-hearted. Price volatility is well above average relative to North American equity indices. Since launch, the fund has traded in a range between $12.50 and $16.00.
The ETF is highly influenced by the anticipated price performance of Facebook. As the Facebook IPO approached, share price of the ETF moved higher. Traders guessed that a successful Facebook IPO would renew interest in the sector. In fact, the opposite occurred. The plunge in the price of Facebook after issue quickly translated into a drop in the ETF from $14.66 to $12.83.
Which security has the best upside potential from current prices? The answer is the ETF. Overhead resistance on Facebook's share price increases as its price approaches the $38 issue price.
On the charts the ETF has a negative technical profile. Intermediate trend turned down on a break below support at $14.60. Units are trading below their 20 and 50 day moving averages. Strength relative to the S&P 500 Index has been negative since mid-February. Short term momentum indicators are oversold, but have yet to show signs of bottoming.
Seasonal influences for the sector are unknown because most of the stocks in the fund have been listed for less than three years and data to complete a seasonality study are insufficient. However, seasonality is expected to follow the trend set by other technology stocks. The technology sector normally has a period of seasonal strength from mid-October to mid-January.
Preferred strategy is to defer investment in the ETF until impact of the Facebook IPO is better understood. Confusion reigns.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also an analyst at Horizons Investment Management, offering research on Horizons Seasonal Rotation Exchange Traded Fund, and a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/