SOCL - SOCL: Not Expensive But Unattractive In Volatility-Adjusted Terms

2023-05-02 04:51:06 ET

Summary

• SOCL invests in a global portfolio of companies that have business exposures to social media.
• SOCL's portfolio is global but relatively concentrated.
• In my estimation, the fund is also trading at prices that are very close to 'fair value', with an IRR potential in the region of 9% per annum.
• The fund is also more volatile than average, so in volatility-adjusted terms, SOCL is unattractive.
• While I don't think SOCL is overvalued, I would rather own a broader, more diversified ETF than SOCL.

Global X Social Media ETF ( SOCL ) is an exchange-traded fund that provides investors with exposure to social media stocks. The fund surprisingly has more exposure to China than the United States, as depicted below, but is nonetheless a global and diversified fund with 44 social media holdings.

SOCL had assets under management of $139 million as of April 28, 2023, with a fairly expensive expense ratio of 0.65%. This follows negative net fund flows of about -$51 million over the past year.

SOCL's benchmark is a lesser-known index, the Solactive Social Media Total Return Index. A recent factsheet for the index explains:

The Solactive Social Media Index tracks the price movements in shares of companies which are active in the social media industry, including companies that provide social networking, file sharing, and other web-based media applications. A maximum of 50 components are included and weighted according to freefloat market capitalization.

In turn, SOCL's portfolio was more recently concentrated in the following 10 stocks depicted below, which includes some notable names such as Meta Platforms ( META ) at 11.28% of the portfolio, Tencent ( TCEHY ) at 9.80%, Pinterest ( PINS ) at 6.32%, Spotify ( SPOT ) at 4.90%, and Alphabet ( GOOGL ) at 4.87%.

While many are familiar with Meta (or Facebook, Instagram, WhatsApp, etc.) and other names in this portfolio (such as Spotify and Alphabet, i.e. Google), some foreign names are less well known. Tencent is Chinese tech company and operator of popular Chinese services such as WeChat and QQ; the company operates across many verticals including social media, gaming, music, video, banking, advertising, and cloud computing.

It is worth noting that SOCL also happens to own stocks such as NAVER ( NHNCF ) which is a South Korean Google-equivalent (i.e., basically a search engine). While Naver has other products and services including "BAND", a kind of " Slack " equivalent, the allocation of 9.54% to Naver stock alone would seem to exaggerate the social media relevance of the company to SOCL's portfolio. While SOCL's benchmark index does say that it also includes "other web-based media applications", the title of the index is somewhat misleading.

Granted, there are perhaps not enough social media stocks to build out a pure-play social ETF, yet I draw attention to this as it is worth noting that SOCL is indeed not a pure-play social media fund. For the high expense ratio, I feel like SOCL does not really serve its intended purpose effectively; it would probably be more efficient to purchase select social media stocks directly (perhaps by using SOCL's benchmark index as a source of inspiration for global possibilities).

Another "hidden" cost is the bid/ask spread, which was 0.47% on a 30-day median basis at the time of writing. While the fund might increase in popularity and the spread might close, this is not something one should count on, especially since the fund was incepted in 2011. Therefore, SOCL is not only costly to hold, but costly to transact in. Nevertheless, we can proceed with gauging the value of the fund using data available from both Global X themselves and Morningstar .

Global X report trailing and forward price/earnings ratios of 38.96x and 24.12x. Morningstar also reports a forward price/earnings ratio of 23.75x and a price/book ratio of 2.65x. Using multiple sources, the underlying return on equity seems to be in the region of 11% on a forward basis. Assuming returns on equity hold up, and Morningstar's forward three- to five-year average earnings growth rate of 8.70% is roughly correct, I estimate the fund is likely to generate an IRR in the region of 9.17%. This is using a relatively arbitrary forecast earnings growth rate, but in line with forecasts, and sufficient to maintain an underlying portfolio return on equity of circa 9-11%.

While weighted global risk-free rates are low (2.75% as pictured above, per my calculations), ex-U.S. markets (and especially politically more uncertain nations such as China) tend to be awarded higher equity risk premia than U.S. equities. So, the headline IRR, with an underlying ERP implied of just under 6%, suggests modest under-valuation but generally speaking a kind of return profile that seems fair. I think SOCL is probably fairly valued in USD terms, all considered, which would leave me placing a neutral bias on the fund.

In terms of volatility-adjusted returns, SOCL is more volatile than average; its S&P 500 beta is 1.19x on a five-year basis . While I am comfortable with taking a bullish bias on certain funds with poor volatility-adjusted returns (provided that the funds are undervalued and offer high nominal returns), in this case SOCL offers an "average" return profile with sub-par volatility-adjusted returns. In my opinion it would be much more attractive owning an S&P 500 tracker than SOCL.

The only reason to own SOCL would be for an idiosyncratic bet on social media based on one's expectation that social media will generate surprisingly high earnings growth rates over the next few years. Since I have no reason to expect this happening, I am going to take a neutral stance, and suggest that SOCL is fairly valued with no opportunity for alpha.

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