The Global X Social Media Index ETF (NasdaqGS: SOCL) is one of this year’s most impressive ETF specimens. Up almost 51% year-to-date, $50.5 million of SOCL’s $68.4 million in assets under management has flowed into the fund since the start of the year.
Among other catalysts, SOCL has surged on the back of resurgent Facebook (NasdaqGM: FB), ongoing gains for LinkedIn (NYSE: LNKD), jaw-dropping performances from some of the ETF’s Chinese holdings, the ability of Internet stocks to prove durable in the face of rising U.S. interest rates and news of the Twitter initial public offering. [Twitter IPO Icing on the Cake for Social Media ETF]
Even with all those positives in tow, SOCL could be getting ready to give investors a history lesson and it may not be one they want to remember. Although the ETF will turn just two years old next month, some investors think it is starting to act a bit too much the way Internet stocks did in the late 1990s before the brutal bursting of the Internet/technology bubble. [Social Media ETF Suffers First Two-Day Skid in a Month]
“Social media stocks’ valuations currently aren’t at the nosebleed levels seen at the height of the dot-com bust, but they’re ridiculously high compared with blue-chip tech stocks with greater sales and profits,” reports Trang Ho for Investor’s Business Daily.
On a price-to-sales basis, Facebook trades at 20 times while Linked trades at 23 times, according to IBD. The two stocks combine for 22.2% of SOCL’s weight. By comparison, Yahoo (NasdaqGM: YHOO) and eBay (NasdaqGM: EBAY) trade at an average of six times sales, IBD reported.
Data support the notion that SOCL is richly valued. The ETF has a P/E ratio of almost 38 and price-to-book ratio of 4.67, according to Global X data. The PowerShares QQQ (NasdaqGS: QQQ), the NASDAQ 100 tracking ETF, has a P/E of 18.6 and a price-to-book ratio of 3.6. Even the PowerShares NASDAQ Internet Portfolio (NasdaqGS: PNQI), which devotes a substantial part of its weight to expensive stocks like Facebook, Amazon (NasdaqGM: AMZN) and Netflix (NasdaqGM: NFLX), has a slightly lower P/E than SOCL at 36.
MarketPsych, a market psychology research firm, shows investor optimism in SOCL has already gotten too frothy and a near-term sell-off for the ETF could be in the cards, IBD report. Then again, Internet stocks have shown investors the shares can remain richly valued for extended time frames, making timing SOCL’s decline a tricky endeavor.
Global X Social Media Index ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of QQQ, Amazon and Facebook.