Investors are salivating over the Facebook IPO slated for Friday. Facebook will eventually join exchange traded funds that focus on IPOs and sectors, although investors won't participate in any early pop.
This is because ETFs' tracking indices have rules that prohibit a new stock from entering the benchmark until it has traded for a certain number of days.
"It's critical for investors to understand that although ordinary investors may find the first-day gain the most appealing part of an IPO, ETF and ETN investors have no chance of enjoying that gain. In every case, newly issued securities require a certain amount of trading activity before being added," Robert Goldsborough, ETF Analyst, wrote in a recent Morningstar article.
The social-networking giant is going to be a public company as of Friday, May 18, with a market cap implied at about $93 billion to $104 billion. Morningstar analysts believe the company has a sustainable competitive advantage due to its wide economic moat, reports Goldsborough.
ETFs can give investors diversified exposure to the social media sector, but the investment world categorizes Internet companies in no special order. Broadly, Internet companies are engaged either in Internet commerce, or Internet services. Wall Street thus far has assigned some Internet companies to the consumer services or consumer cyclical industries, others to the media or business services realms, and still others to the specialty retail sector.
The following ETFs have the potential to hold Facebook as a holding one day, and the amount of assets that the company may be allocated is not expected to be large off the bat. The reason is that many index providers base their weightings of companies in their indexes on the total value of shares that investors can purchase on open markets.
- Global X Social Media ETF (SOCL) The index allows for "extraordinary adjustments" when a social media company becomes publicly traded. The schedule for Facebook's addition to the index was announced by Solactive in a press release in early May, reports Christian Magoon for Nasdaq. Facebook is expected to join the index on the fifth day of trading. Around 10% of the ETF is expected to be allocated.
- First Trust Dow Jones Internet Index (FDN) Facebook wont be in this ETF for some time. The index composition is reviewed each quarter, and rebalancing occurs after the close of trading on the third Friday of September, which likely will be when Facebook is added to this index and this ETF. And when Facebook is added, its float-adjusted market cap will ensure that its stake remains relatively small.
- First Trust US IPO Index (FPX) A fairly thinly traded fund, FPX replicates an index of the 100 largest and most liquid companies that have gone public in the last 1,000 days. Companies do not join the index until seven days after they begin trading, which means Facebook would join FPX in late May.
- PowerShares QQQ (QQQ) Facebook will be included in the Nasdaq 100 within 3 months of trading. The 10% cap for weighting does not apply to this index, which may lead to more concentrated exposure than SOCL, reports Magoon.
Tisha Guerrero contributed to this article.
Disclosure: I am long QQQ.
Additional disclosure: Tom Lydon's clients own QQQ.