The “Big Three” of social media –Facebook Inc. (FB) , LinkedIn (LNKD) and Twitter ($TWR) – are enormously popular with retail investors. This can be attributed partly to the name recognition these companies enjoy with the public, and partly to their explosive growth. All three companies enjoyed massive upticks in 2013, with LinkedIn still bringing up the rear despite a 92-percent gain for the year.
Building one’s portfolio around a single security, however, is usually considered unwise. The necessity to diversify one’s portfolio carries over to social media like any other sector. For investors looking to capitalize on the social media boom without directly exposing their investments to just one equity, a robust alternative market exists.
Here’s a rundown of some of the most popular methods for investing in social media without betting on one single company:
From Many Companies, One: The Exchange-Traded Fund
Exchange-traded funds, commonly known as ETFs, are a relatively new and exceedingly popular way for investors to put their money on an entire market. By using complex algorithms and a “basket” of securities, ETFs closely mimic the movement of a specific investment category, be it a commodity like gold, an index like the S&P 500, or a specific part of just one stock market sector – like, say, the social media component of Tech.
The first social media ETF Global X Social Media Index ($SOCL) incorporates 27 social media companies into its portfolio. The Big Three comprise just 26 percent of the ETF, with the rest coming from two places: international social media businesses, including prominent Chinese social media holding companies Tencent and SINA (SINA) and a few Russian and Japanese plays; and domestic American tech companies that – while not classified strictly as social networks – incorporate elements of social media into their product(s), like Yelp (YELP) , Groupon (GRPN) , and Google Inc. ($GOOG).
While no other ETF follows the social networking industry as closely as SOCL, several others dedicate a portion of their portfolio to social media investments. Powershares NASDAQ Internet Portfolio (PNQI) holds 10.32 percent in Facebook, 8.44 percent in Google, 3.5 percent in Chinese company Baidu (BIDU) , and a 1-percent interest in Sina, bringing the social media portion of the ETF to around 23 percent. Similar to PNQI is First Trust Dow Jones Internet Index ($FDN), whose social media holdings also include Google and Facebook as well as LinkedIn and comprise about 21 percent of their portfolio.
Investing Like an Angel
Of course, this kind of investing only applies to companies already trading publically. Whether investing in an individual stock or even a bundled social media ETF, these investments can hardly be considered getting in on the ground floor of a social media play. To really get in early, an investor has to become what is known in the Tech world as an “angel investor.” Think Peter Thiel, Facebook’s original angel, who got 10.2 percent of that company for a relatively paltry $500,000 investment. Of course, Thiel is now a billionaire and one of the most powerful men in the Tech sector.
Once the domain of Silicon Valley insiders with inside connections and insanely deep pockets, with the advent of the crowdfunding movement angel investing has opened up greatly to the general public – albeit it with a substantial roadblock. In order to be an angel one must meet the criteria of an accredited investor. To be considered accredited, an individual (or individual and spouse) must have a net worth of at least $1 million. The rest of the requirements can be found on the Security and Exchange Commission’s website.
A few things about angel investing must be pointed out. Angel investing is very, very risky: investors will only see a return on their investment if the startup goes public (like Twitter, LinkedIn and Facebook) or is acquired (like Instagram and Tumblr). Also, investors can’t pull their money out: once that investment is turned over to a start-up so that they can develop their product, that money is theirs. No callbacks, no return – until everyone gets paid.
To mitigate the risk of angel investing, angels often invest in groups, or spread out investments over several start-ups, with at least 10 being considered “playing the startup game right.” While much riskier than equities investing, angel investing can provide a chance for an investor to get in way early, and potentially reap big rewards. Of course, for every Facebook there’s a Friendster (or two, or three), so investors should always do their own research and draw their own conclusions.
Where There’s Social Media…
If one wishes to truly invest in social media by proxy, one can look to invest in companies that, while not social media entities themselves, have a highly symbiotic relationship with that industry.
Certain gaming companies might be considered to be more parasitic than symbiotic, but they too enjoy close ties to social media. Zynga (ZNGA) , while now diversified, can credit Facebook with helping spawn its most popular creation, Farmville. King, makers of Candy Crush, also can credit Facebook with greatly helping spread the word on their product via feed spamming.
Other industries that benefit from the massive popularity of social media include internet providers like AT&T (T) , “Big Data” storage manufacturers like NetApp Inc. (NTAP) , and mobile media advertisers like Millennial Media (MM) .
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