Investing in Twitter Through ETFs

NEW YORK ( TheStreet) -- Thursday's big news was that Twitter filed a confidential S-1 form with the SEC, which is the first regulatory step in the process for an initial public offering or IPO. The significance of the word confidential is that, under the JOBS act, companies with revenue less than $1 billion do not need to disclose their numbers in this first step of the process.

Although the actual listing probably won't happen until early next year, there is already plenty of speculation about what the value of the company might be when it actually starts trading. On many accounts, the company had a private market value of $10 billion earlier this year, leading some to conclude that the pricing of the IPO in a few months could be around $14 billion. Regardless of its initial value the stock could go higher right away, along the lines of other social media companies like LinkedIn ( LNKD), whose IPO was priced at $45 and closed its first day of trading at $94.25.

There will be several ETFs that will offer different levels of exposure for investors interested in owning Twitter but not wanting to take single-stock risk.

The Global X Social Media ETF ( SOCL) added Facebook ( FB) after 10 days of trading. At the time, CEO Bruno del Ama was quoted as saying that waiting 10 days before adding it to the fund could avoid some of the initial volatility. Regardless of whether there is more volatility in the first few days for Twitter stock, based on current numbers under the hood of SOCL, Twitter would be the fifth-largest holding with perhaps a high single-digit weighting in the fund.

Of course, Facebook is by far the largest company in the space, but the weighting is capped and currently is 12% of the fund, which is the same weighting as Tencent Holding ( TCEHY) and Sina ( SINA), which are both Chinese companies. Twitter's potential weighting in SOCL would be enough to move the needle right away.

The other ETF likely to add Twitter soon, and in a meaningful weighting, is the First Trust DJ Internet Index Fund ( FDN). Based on FDN's current constituency, Twitter could be a top-10 holding, with approximately a 3%-4% weighting. FDN's largest holdings are Google ( GOOG), Amazon ( AMZN), eBay ( EBAY) and Facebook. Stocks are eligible for inclusion once they have three months of trading history.

A third fund likely to add Twitter is the First Trust U.S. IPO Index Fund ( FPX). IPOs can be added on the first day of the next calendar quarter and remain in the fund for their first 1,000 days of trading. Based on current numbers, the Twitter IPO would be about the 20th largest holding, and so only have around a 1% weight, which would be less likely to move the needle on the fund. That is unless, of course, the stock goes on to be wildly successful and grows into a larger weighting in the fund.

FPX is a broad-based fund that potentially serves as a core equity holding. FPX has reasonably diversified sector exposure, with 26% in consumer discretionary, 21% in tech and 16% each in energy and health care. It also has exposure to industrials, financials and staples, but has little to no exposure in materials, utilities and telecom.

The bull case for Twitter simply revolves around the extent to which it provides a means for media outlets, companies, athletes and performers to communicate with its audience, customer base or fan base in a way that previously did not exist. Obviously, friends and colleagues can also communicate with each other.

The three ETFs profiled above offer different levels of potential involvement in a much-anticipated IPO. There can be no assurances that Twitter will actually come public and no guarantee that it would be included in any ETF. However, if it does, it will be eagerly anticipated and widely followed, which makes it very likely that ETF providers will want to include it in their funds, where appropriate.

At the time of publication the author held no positions in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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