What Will A Facebook IPO Mean For ETFs?

by on January 31, 2012 | ETFs Mentioned:

The rumors have been swirling for years: Facebook will IPO next month, next quarter, next year. But each time it seems that investors are disappointed with no such event. However, 2012 may finally see the long-awaited IPO from the social networking giant. Before you roll your eyes and click out of the page, consider some new developments that make this event very likely. Other than unnamed sources confirming an IPO in early to mid 2012, the company’s private stock has been frozen for the past three days, a move that typically coincides with a filing to go public in the near future. “Facebook and companies who do this don’t want to expose themselves to lawsuits related to the fact that some people had it before others and were able to trade on it,” Sam Hamadeh, CEO of private company research firm PrivCo, told Bloomberg. “The best way to protect yourself is to have no one able to trade” [see also 12 High-Yielding Commodities For 2012].

Facebook Public?

It should be noted that Facebook has halted its shares before in order to update its list of shareholders, but with all of the rumors swirling, it appears that this time may be the real deal. Early reports put the company as a member of the tech-heavy Nasdaq along with a hefty valuation topping $100 billion. That would mark the largest IPO in history. It should come as no surprise however, given the massive global reach that the company has. The social network is available in multiple countries, multiple languages, and was home to over 800 million active users as of September of 2011. Alexa, a website which ranks the web based on pageviews, users, and other metrics, notes that Facebook is the second most popular website in the world, with only Google topping the social network [see also The 10 Most Profitable ETFs In The World].

It was estimated that the firm raked in over $4.3 billion in revenues for last year and looks to extend those gains to investors if it were to launch and IPO in the coming weeks. According to multiple sources, the IPO was due to launch between April and June of this year, but that time frame has now been narrowed down to May. Note however, that with this predicted window, the filing would need to come relatively soon, as it can take anywhere from three to four months for the SEC to review the documents and approve the order.

With the world’s largest IPO tentatively set to hit markets, it will certainly have a major affect on some popular favorite ETFs. But ETFs will also offer a way to make a play on Facebook as they will surely include the company if it does indeed go public. After seeing some of the hefty volatility that newcomers like Groupon and Zynga endured, many investors may feel more comfortable with a diversified play utilizing an ETP. Below, we outline three ETFs that could be shaken up by this potential IPO [see also The Ten Commandments of Commodity Investing].

PowerShares QQQ (QQQ)

This ETF replicates an index that includes the 100 largest nonfinancial components of the Nasdaq. With over $26 billion in assets and an ADV topping 35 million, QQQ is the seventh largest ETF in the world and ranks fifth by daily volume. With QQQ utilizing a cap weighting structure, Facebook could easily make its way into the top ten holdings if the company lists on the Nasdaq, as the predicted $100 billion+ valuation will put it above several of QQQ’s largest allocations. Note that buying into QQQ prior to the IPO could make for a safer way to play what will likely be a volatile debut for Facebook [see also ETFs: The $10 Billion Club].

Social Media Index ETF (SOCL)

This one is a no-brainer. Tracking an index that measures the equity performance of the largest and most liquid companies involved in the social media industry, Facebook will surely get a large representation in this ETF. Considering that Google is the only top holding (ranked in 7th place) with more than $100 billion in market cap, it would not be surprising to see Facebook overtake the number one holding. While it may not be bigger than Google on debut, it is a pure social media site, and will dwarf the other holdings of this young ETF [see also High Tech ETFdb Portfolio].

Nasdaq Composite Index Tracking Stock (ONEQ)

ONEQ tracks the NASDAQ Composite Index, which measures all NASDAQ domestic and international based common type stocks listed on The Nasdaq Stock Market. This yields top holdings like Apple, Microsoft, Google, and a number of others. While Facebook is not big enough to take the top slot of this fund, it would likely secure a spot in the top ten, and hold a significant weight for the overall product.

Disclosure: Photo courtesy of Elaine and Priscilla Chan. No positions at time of writing.