Global X Social Media Index ETF underperforms as ad spend falls

Declining advertising spending over the last few months has harmed the shares held within the Global X Social Media Index ETF. As social media companies experience a decline in revenues and a rise in costs, they have been forced to cut down on staff numbers, seeing a reversal in much of the growth seen during the pandemic years.

- Rising inflation has eaten away at companies’ advertising budgets, harming the revenues of social media companies in the process

- Snap and Meta have led losses this year as growth continues to slow

- Social media companies target a shift towards ecommerce to recover growth over the next few years.

As companies have been slashing advertising budgets, this has eaten into the margins of the world’s leading social media players. This, in turn, has put the Global X Social Media Index ETF [SOCL] in a steady decline over the last few months, dropping 42% year-to-date.

The Global X Social Media Index ETF currently has 42 different holdings with Tencent [0700.HK], the Chinese owner of WeChat, making up 12.02% of total holdings as of 2 December. US social media giant Meta Platforms [META] is the fund’s second-largest holding, making up 9.17% of total funds, while the South Korean search platform Naver [035420.KS] sits in third place, making up just under 6.61% of total assets.

The fund had a strong couple of years during the pandemic and surged over 100% between March 2020 and 2021. As individuals retreated into homes during lockdowns, the time they spent on social media surged while advertisers fought hard for their attention. However, rising inflation has compressed advertisers’ budgets in recent months and social media shares have underperformed as a result.

Snap and Meta lead losses for the Global X Social Media ETF this year

One of the fund’s key holdings, Snap [SNAP], has pushed it down over the last few months. The US-based social media giant’s share price has tanked by 77.7% since the turn of the year on the back of widening losses and slowing revenue growth. The company makes up 6.07% of the total fund, contributing to the negative performance of the Global X Social Media Index ETF this year.

Snap gained 6% year-over-year in revenue growth for its third quarter (Q3), which was the slowest level of growth since the company went public in 2017. Net losses rose by 400% year-over-year to $360m, from $72m for the same period in 2021. The company blamed lower advertising budgets for the sharp decline in net profit and the resulting share price.

The weaker advertising market has also harmed Meta shares this year, which have fallen 63.3% in 2022 and make up 9.17% of total fund holdings. The company has been forced to cut the jobs of approximately 11,000 employees, approximately 13% of its total workforce.

Alphabet shifts to ecommerce to stimulate growth

With inflation set to continue to eat away at company advertising budgets, social media giants are seeking new directions to generate growth and protect against future losses. Alphabet [GOOGL], which is the fund’s ninth-largest holding at 4.75% of total assets, has announced plans to generate new forms of revenue from its video-sharing platform YouTube.

Instead of focusing on advertising, YouTube is pushing toward ecommerce by introducing shopping features on the platform, allowing users to buy goods without leaving the site.

Social media rivals Meta and TikTok have also pushed towards the social commerce space in the last few years, and both enable goods to be purchased on-site. The goal with this feature is to allow social media companies to drive their own sales, rather than depending on the advertising budgets of external companies, which can rise and fall.

The market for social ecommerce is estimated to grow to more than $2tn by 2025, with the largest chunk of income coming from China. Analysis carried out by the Global X Social Media Index ETF suggests that by 2025 social commerce sales will make up an estimated 5.9% of total ecommerce sales.