The only exchange-traded fund that solely tracks social media companies climbed to record levels on Friday, extending its pronounced 2016 outperformance on a report that Twitter Inc. TWTR, +0.00% could be acquired.
The Global X Social Media Index ETF SOCL, -0.04% rose 1.1% on heavier-than-average volume in afternoon trade. The ETF was on track to close at a record high for a third-straight session, bringing its year-to-date gains to 27%.
The fund has far outpaced other technology ETFs, including the First Trust Dow Jones Internet Index Fund FDN, +0.38% up 8% this year, and the PowerShares Nasdaq Internet Portfolio PNQI, +0.39% up 9.2%. The most widely used technology fund, the Technology Select Sector SPDR fund XLK, +0.48% is up 11% in 2016. (A fifth fund that tracks the industry, the SPDR S&P Internet ETF XWEB, +0.00% was launched on June 24. It is up 17.3% since then.) The S&P 500 SPX, +0.57% is up 6% so far this year.
The Social Media ETF’s rally on Friday came after CNBC reported that Twitter had engaged in talks to be acquired, with Google parent Alphabet Inc. GOOGL, +0.27% and Salesforce.com Inc. CRM, +0.34% among the reported buyers. The news sent Twitter shares up 20.6% to $22.47, their biggest one-day pop ever, though it remains down 3.8% for the year. (The microblogging company went public in 2013.)
The rally translated to the ETF, where Twitter is the third-largest holding, comprising about 8.94% of the portfolio. The gain was more than enough to offset a 1.3% decline in Facebook Inc. FB, -0.02% stock. On Thursday, sources said Facebook, the biggest social media company, had vastly overestimated the average viewing time for the video ads on its platform for two years.
The fund’s performance relative to its tech peers has particularly strong since June, when Microsoft Corp. MSFT, +0.16% agreed to buy LinkedIn Corp. LNKD, +0.12% for $26.2 billion. LinkedIn is the fourth-largest holding of the ETF, comprising about 8.8% of the portfolio total.
It has also benefited from much stronger revenue growth, with the fund’s components posting one-year average revenue growth of 27.1%, according to FactSet data. That is more than twice the 10% growth rate of the Technology SPDR fund and more than 10 times the 2% revenue growth of the components of the SPDR S&P 500 ETF SPY, +0.63% which tracks large-cap U.S. stocks.
“If you want growth within tech, you need to be targeted, and social media in particular plays on a lot of big trends: it is international in focus, it has a huge tailwind from the millennial generation, and there’s been a lot of M&A activity in the space,” said Jay Jacobs, director of research for Global X Funds. “A broader tech fund will have basic hardware type companies, which is an area that basically grows at the same pace of GDP, while social media is really growth oriented, which resonates in this market.”
Compared with the broader internet space, the higher revenue growth of social media companies comes at a lower valuation, based on a price-to-earnings metric. Components of the First Trust ETF have average revenue growth of 17.8% and a P/E of 71.4x, while the PowerShares fund has revenue growth of 25.9% and a P/E of 60.75x. The average P/E for the social media fund is 49.1x, well below the internet funds, although above the 27.32x P/E of the SPDR fund.
Investors have taken note. Over the past month, the $121.7 million Social Media ETF has seen inflows of $27.9 million, according to FactSet, well above the $4.3 million inflows into the PowerShares fund, which has about $280 million in assets. Other tech ETFs have seen outflows of late: First Trust’s has seen outflows of $52.8 million over that same period, while the SPDR fund has seen outflows of $145.6 million.
Because the social media space is dominated by only a few names—especially since major players like Instagram are owned by Facebook—holdings in the fund are concentrated, which means moves in single stocks can have an outsize impact on the fund. The ETF’s top four positions account for about 37.5% of the total portfolio. In addition to Twitter and LinkedIn, the top four includes Tencent Holdings Ltd. 0700, -1.75% a Chinese company that comprises about 10% of the portfolio, and Facebook, which comprises 9.66%.