NEW YORK (TheStreet) -- With the announcement that Facebook was dropping $1 billion to scoop up the photo-sharing service, Instagram, the social media landscape has again found itself thrust into the spotlight. Unfortunately, neither Facebook nor Instagram are traded publicly, so how are investors supposed to target this burgeoning corner of the technology sector? The social media industry is still relatively young and, for ETF investors, finding a proper instrument can be a tricky endeavor. While there are a variety of options available, not all are equally appropriate. Therefore, when preparing a game plan, individuals must be prepared to do their homework.
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Case in point: at first glance, a fund like the Global X Social Media Index ETF may seem like an obvious choice for those looking to tap into social names like LinkedIn or Yelp. Upon proper investigation, however, challenges quickly arise. For one, while names like LinkedIn can be found toward the top of the list, the bulk of the SOCL's index is comprised of companies that many domestic investors have likely never heard of.
Popular U.S.-based companies represent a respectable portion of SOCL's portfolio. However, the fund is ultimately a global play on social media. Asia, in particular, dominates its portfolio. According to the fund's fact sheet, companies based in China and Japan representing a combined 60% of its total assets. Investors unfamiliar with companies like Tencent Holdings, Sina Corp. or Yandex will likely have trouble determining the fund's long-term prospects.
SOCL's sweeping geographic reach is not its only challenge, though. In addition, the fund has struggled in the past to generate investor interest. With an average trading volume under 35,000, the fund may be susceptible to liquidity-related issues down the road.
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Attempting to use a dedicated ETF like SOCL may not be the best or most comfortable strategy for those looking to take advantage of social media proliferation. Instead, investors may want to consider taking aim at the broader Internet realm. Thanks to the advent of smartphones and tablets, today's consumer can access the Internet at anytime, anywhere. The services provided by companies such as Facebook, Twitter, and Pinterest have only helped to further engrain the Internet into many of our daily lives. As growing crowds of people turn to the World Wide Web in order to connect with loved ones, get their retail fix, or find out what is happening around the world, companies like Amazon, Google, and eBay will be standing on the sidelines prepared to profit.
While it lacks direct exposure to many publicly traded social media names, the First Trust Dow Jones Internet Index Fund appears to be a more reliable play for investors looking to position themselves for industry's growth. In addition, the fund boasts the proper size and trading volume that will allow it to overcome liquidity challenges.
Facebook's Instagram purchase is likely the first of many social media-related stories that will steal headlines in the coming weeks as investors, analysts and market commentators anxiously prepare for the Facebook IPO which is reportedly scheduled for May.
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We are in the midst of an exciting period for this fledgling corner of the technology sector. Nevertheless, investors should be careful not to let themselves get carried away here.