Internet and Communication Services ETFs hit by Facebook plunge

Jul 26th, 2018 | By | Category: Equities

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Internet and Communication Services ETFs have taken a hit on the back of a slump in the price of Facebook stock, which dropped 20% following the announcement of its latest quarterly earnings.

Internet and communication services ETFs hit by Facebook plunge

Internet and Communication Services sector ETFs have been hard hit by sharp drop in the price of Facebook stock.

The social media giant saw its market value dive by around $120 billion on Thursday, causing pain for ETFs that hold the stock in significant quantities.

Those with significant exposure to the company include pure-play internet ETFs, such as the European-domiciled First Trust Dow Jones Internet UCITS ETF and its US equivalent, First Trust Dow Jones Internet Index Fund (FDN), and Communications Services sector ETFs, such as the Communication Services Select Sector SPDR (XLC) from State Street Global Advisors.

First Trust‘s internet funds have about 9.1% allocated to Facebook.

SSGA’s recently launched communications services sector ETF has a mighty 21.7% weight in the stock.

The SSGA fund only launched last month and tracks the newly minted GICS sector, which is a composition of the existing Telecommunications Services sector along with selected companies from the Information Technology and Consumer Discretionary sectors. The sector officially launches in September.

Investors in the equivalent Vanguard ETF, the Vanguard Communication Services ETF (VOX US), the only other ETF dedicated to the new sector, will be grateful that it is currently tracking a transition benchmark, namely the MSCI US Investable Market Communication Services 25/50 Transition Index. This transitional benchmark was put in place to minimize the impact to the fund as MSCI (which co-administers GICS) implements the index changes. It means the fund’s weight in Facebook is a reduced, though still punchy, 12.8%.

Facebook’s plunge was triggered by numbers pointing to a slowdown in user growth and rising compliance costs.

The firm has been plagued by data privacy issues recently, including the widely publicised Cambridge Analytica scandal which saw CEO Mark Zuckerberg testify before Congress on Facebook’s data protection policies and sparked a “delete Facebook” movement.

In a conference call, company executives announced that while the number of active users was up 11% from June 2017, at 2.2 billion, the figure marked the slowest growth in more than two years. And whilst Facebook reported that total revenue for the quarter rose 42% to $13.2bn, this was below analysts’ estimates of $13.4bn.

Other funds to feel the pinch include the Global X Social Media ETF (SOCL US), which was the first ETF launched to target global firms operating in the social media space. Owing to its 12% holding in Facebook, it too felt the full force of Facebook’s fall, opening down 3.8% from its previous close. SOCL tracks the Solactive Social Media Total Return Index and has around $190m in AUM. It comes with an expense ratio of 0.65%.

The $700 million Invesco Nasdaq Internet ETF (PNQI US) was also hit. PNQI tracks the Nasdaq Internet Index, a free float-adjusted, market cap-weighted reference for US internet stocks. Its expense ratio is a little higher than FDN at 0.60%.

Investors in the $50m SPDR S&P Internet ETF (XWEB US), however, were better protected thanks to the equal-weighted approach of its underlying S&P Internet Select Industry Index. By equally weighting its 71 constituents, the fund is less exposed to larger-cap (and potentially overvalued) stocks such as Facebook, and more exposed to smaller (and potentially cheaper) stocks. XWEB’s exposure to Facebook is just 1.7%.

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