Facebook's Decline Has Hurt These ETFs

Matt Thalman - INO.com Contributor - ETFs - Facebook

When a major company such as Facebook Inc. (NASDAQ:FB) is caught in a scandal, the declining share price doesn’t just hurt investors who knowingly bought shares of the company. It also hurts all those unsuspecting shareholders who may own part of the company through different Exchange Traded Funds.

On March 16th, shares of Facebook were trading at $185.09. The news broke that 50 million customers had their data taken from Facebook by a company called Cambridge Analytica and used to persuade American’s to vote for President Donald Trump. By March 27th Facebook shares had bottomed out at $152, a nearly 18% decline from the day before the story broke. As of this writing, shares of the social media giant have recovered a little, and now they trade at $160 per share, still a 13.5% decline.

Anyone that knowingly owned shares of Facebook before this story breaking has decided to either ride this rough patch out or jumped ship. But, some investors own shares of Facebook and have likely taken a beating because of the situation and may not even have known what was causing their portfolios to fall.

For example, if you own shares of Global X Social Media ETF (SOCL) you have watched the fund fall 7.27% over the last month and while you probably knew it owned shares of Facebook, consider it is a Social Media ETF, did you know Facebook was the third largest holding, representing 8.26% of the fund. The fund is still up 3% year-to-date, likely due to Twitter’s (TWTR) strong 2018, but depending on how long and how much worse the Facebook scandal gets, this may be an ETF you want to avoid for the time being.

Facebook is the second largest holding and represents 7.65% of the First Trust Dow Jones Internet Index Fund (FDN). FDN holds the largest 40 US internet companies and prominently features the FANG stocks, Facebook (FB), Amazon.com (AMZN), Netflix (NFLX), and Alphabet (GOOG) all of which have been beaten up over the last few weeks. But considering FDN is only down 4.33% since the start of March, investors haven’t been hurt too badly from Facebook’s decline, especially considering the S&P 500 is off by 4.99% over the last month.

Facebook is also the third largest holding in the iShares U.S. Technology ETF (IYW). The social media stock represents 7.06% of the fund and has likely played a large role in its 5.84% decline over the last month.

One ETF that hasn’t been crushed as of late, only down 3.74%, but could see some big changes is the iShares MSCI KLD 400 Social ETF (DSI). This ETF tracks a market-cap-weighted index of 400 companies deemed to have positive environmental, social, and governance characteristics by MSCI. The ETF is marketed as one that is for investors who are looking for socially conscious ETF. With Facebook’s current public relations nightmare, it's hard to see how MSCI justifies keeping the company in the ETF moving forward. But what makes matters worse is that Facebook represents 3% of the fund, which should I remind you owns 400 different stocks. It will be hard for the fund manager to reallocate those funds without further affecting the ETF’s performance moving forward.

The ETF’s mentioned above are just a few in which Facebook represents a large weighting, but there are many, many other funds that have more than 2% of their assets in the social media company.

The point is, regardless of whether it is Facebook, Amazon.com, Netflix, or whatever company; you need to cross-reference both your holdings and the large holdings of the ETF’s or mutual funds that you own to make sure you are not overly exposed to one single company. In some cases, if you are, you may be alright with that amount of single stock risk, which is fine. But, if you aren’t comfortable with the additional risk, you may want to consider selling the individual shares you own in that particular company or buy a different ETF, that doesn’t have the same exposure.

Lastly, remember even when you buy ETF’s, you really don’t want to completely “buy and forget” because while this Facebook situation will likely pass and not materially affect the stock in the long term, you could own stocks that make much larger mistakes which have much longer lastly affects on the stock price. And in those situations, you don’t want to leave it up to the fund manager to reduce your exposure and risk; you may want to do it yourself by merely selling the ETF altogether.

Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513

Disclosure: This contributor held long positions in Facebook, Amazon.com, Netflix, Alphabet, and Twitter at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.