Know What You Own!
Solactive Social Media Index: A thematic play on the global social media industry.
Thematic investing has become extremely popular in recent years. Whether its pot stocks, clean energy, robotics, agribusiness, or cybersecurity - thematic funds offer us a way to obtain concentrated exposure to some of the world’s most interesting trends. One trend in particular, is the growth of social media. The Solactive Social Media Index tracks companies active in the social media industry, including social networking, file sharing, and other web-based media applications.
Before we dive into composition and technicals, let’s learn about the index itself. What’s the methodology? How are investments selected? When does rebalancing occur? Let’s get into it.
Weighting
“The Percentage Weight of Index Components is capped at 10%.”
“The Percentage Weight of an Index Component which is not considered a Pure Social Media Company 1 is capped at 4.75%.”
“The cumulative Percentage Weight of all Index Components with a Percentage Weight of more than 5% is capped at 48%.”
“The excess weight is allocated proportionally to all Index Components whose Percentage Weight is not capped.”
Adjustment (Rebalance) Days
“The composition of the Index is ordinarily adjusted twice a year on the last Business Day in April and October.”
If a new IPO starts trading and is a strong candidate / player in the social media industry, the index committee can decide to include the company as an extraordinary adjustment event 2.
Components
The minimum number of Index Components is 25 and the maximum number of Index Components is 50. Currently as of August 6th, there are 42 holdings in the index.
“If a company is removed from the Index between two Adjustment Days due to an Extraordinary Event, if necessary, the Committee shall designate a successor.”
As expected, in order to be included in the index, a company must have a “significant” amount of its revenues be generated from activities related to social networking. Or a company is expected to generate a significant part of its revenues from social networking / related activities.
Before even looking at the individual names, I find it important to understand how the index works! There is more information that can be found in the Solactive Guideline but for the sake of this post I kept it to the above.
Composition
Below is a chart displaying composition by currency. Only ~15% of the index is denominated in currencies not pegged to the US Dollar. 44% of index constituents are Non-US stocks, yet 75% are denominated in USD. Therefore, ADRs denominated in USD are the reason we see such a high USD percentage. ADRs do not eliminate currency risk, this is worth understanding before investing in a fund loaded with ADRs!
Exposure by country is broken down below. The index contains a substantial amount of Asia Emerging equities (China + South Korea make up nearly 35% of the index).
Top 10 Holdings
Facebook Inc. (12.71%)
Snap Inc. (10.58%)
Tencent Holdings Ltd. (7.43%)
Twitter Inc. (6.67%)
Kakao Corp (6.17%)
Alphabet Inc. (6.07%)
NAVER Corp (5.77%)
Match Group Inc. (4.57%)
Yandex (4.31%)
NetEase Inc. ADR (4.18%)
The Solactive Social Media Index is +4.4% year-to-date, weighed down heavily by the recent decline in China Technology Stocks such as Tencent, NetEase and Baidu.
Price Charts
The index is trading below the 50 and 200 day moving average for the first time since the COVID decline of March 2020.
Below is a 1-year snapshot of 16 holdings with the highest market cap (remember the weighting criteria, there’s a 4.75% limit if the company is not a “pure social media company”). A lot of these names peaked in February/March of this year i.e. $TWTR, $BIDU, $NTES, $SPOT, $MTCH to name a few.
Below is a chart of Tencent Holdings Ltd. The 3rd largest holding in the index and one of the biggest YTD decliners. The primary trend is still higher, but as a technician, I’d feel more comfortable owning if price > 20-month MA.
The Solactive Social Media Index is one of the most interesting indices in the thematic universe. However, just like any index - we need to understand how it is constructed and how it is set to evolve as social networking expands into new markets.
That’s enough out of me.
SM
The index guideline states that a “Pure Social Media Company” is a company whose primary source of revenues is generated or is expected to be generated in the social media industry, as determined by the Index Committee.
“Extraordinary Event” is: A Merger, takeover bid, delisting, Nationalization of a company or Insolvency.