ETF Still The Better Social Media Bet Than Facebook

One of the primary advantages of most equity-based ETFs, emphasis on "most," is that these products are useful in reducing an investor's single-stock risk. Indeed, there are examples of ETFs that have excessive weights to just one or two stocks. The iShares Dow Jones U.S. Technology Sector Index Fund's (NYSE:IYW) 24.4 percent weight to Apple (NASDAQ:AAPL) and the Market Vectors Oil Services ETF's (NYSE:OIH) 19.5 percent allocation to Schlumberger stand as two examples.

The point is many equity-based ETFs are not dogs being wagged by the tail of just one or two stocks. One exception, at least for a little while, was the Global X Social Media Index ETF (NASDAQ:SOCL). Not surprisingly, SOCL caught investors' attention not only because it was the first (and still the only) ETF devoted to the social media space, but also because plenty of folks expected Facebook (NASDAQ:FB) to come roaring out of the gates and that SOCL would be a good proxy for capturing some of that momentum.

That has not happened, but shares of Facebook have recently rebounded. In the past five days, the stock has surged 9.5 percent, a move that has helped SOCL climb 7.7 percent.

"Facebook is a holding in SOCL, which currently is the only ETF to specialize in providing exposure to the "Social Media" space, and FB's performance since inception has indeed been disappointing, and no doubt has been weighing on the ETF," Street One Financial's Vice President of ETF/Options Sales Trading Paul Weisbruch said in a note.

Facebook has never accounted for an alarmingly high percentage of SOCL's weight, but it can be said it is the perception that the stock must do well in order for SOCL to be a success that looms large. When Facebook was first added to the ETF after its fifth trading day, it was with a weight of 8.8 percent. On July 25, that weight had fallen to 8.2 percent. At the close of trading Wednesday, Facebook was just SOCL's sixth-largest holding with an allocation of less than 5.7 percent, according to Global X data.

Despite Facebook's recent jump, there are signs that SOCL remains the better avenue for playing the social media sector, not the least of which is the fact that the ETF can move up while Facebook slides. As one example, SOCL was able to trade higher during the first half of August even as Facebook, Groupon (NASDAQ:GRPN) and Zynga (NASDAQ:ZNGA) all plunged.

In the past month, Facebook is off 3.9 percent. Not bad by the low standards thus far set forth by the stock, but over the same time, SOCL is up almost 5.2 percent. It can be argued that SOCL's recent performance in the face of Facebook headwinds underscores why ETFs are popular. Investors can gain access to a basket of stocks and participate in some of the upside offered by the fund's holdings. Perhaps more importantly, those investors will not be exposed to a single stock catastrophe to the fullest extent when that stock represents just a small slice of a larger pie.

Said another way, common sense and practical math dictate that even though both are down, SOCL has been the far better bet since the Facebook IPO than the stock itself. Now, there are signs of momentum creeping into SOCL and the ETF may not even need a big contribution from Facebook to spurt higher.

"In the past month, SOCL has fared much better than FB stock, so there is some life in the sector despite FB's stock woes," Weisbruch said in the note. "For example, LinkedIn (NYSE:LNKD), the largest holding is within shouting distance of all-time highs that were just touched last week and Sina (NASDAQ:SINA) and Yandex (NASDAQ:YNDX) for example have recently broken out of downtrends and are resuming upward momentum on very high trading volumes in recent days. Perhaps going into the end of 2012, more investors will be able to say that they Like FB and the Social Media space in general as opposed to the their probable current sentiments."

That assessment does not include Google (NASDAQ:GOOG), SOCL's fifth-largest holding. The Internet search giant is also flirting with all-time highs. LinkedIn, Sina, Google and Yandex combine for 31 percent of SOCL's weight. If those stocks continue to perform well, perhaps investors will acknowledge the reality that SOCL is not a "Facebook ETF." Rather, it is an ETF that merely holds the stock.

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(c) 2012 Benzinga does not provide investment advice. All rights reserved.