The Xchange Blog

Facebook Sneezed and Tech Caught a Cold

The Cambridge Analytica scandal, which sits among the many controversies currently surrounding Facebook, has done a number on the company’s reputation, both on Main Street and Wall Street. In the week following the revelations that its data was used to target voters in the presidential election, Facebook shares experienced their largest percentage drop—16%—since July 2012, knocking out $80 billion of market cap.

Facebook’s woes also dragged down the entire tech sector. The Technology Select Sector Index, which is the target index for the Direxion Daily Technology Bull 3X ETF (TECL) and Bear 3X ETF (TECS), is still down from its 2018 highs in mid-March.

Tech ETFs
Data Range: 3/1/2018 – 4/18/2018 . Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. One cannot invest directly in an index. The candlestick chart above displays the high, low, opening and closing values of the index on a daily basis. The wide part of the candlestick is called the “real body” and indicates the opening and closing value for the day. Red indicates it closed lower; green indicates it closed higher. The thin part of the candlestick chart indicates the high and low values for the day.

Reaction to Mark Zuckerberg’s testimony during the congressional hearing was mixed. Privacy and security advocates were disappointed by the lack of clear company action taking place after the hearing. But traders have seemingly found some solace in the promises made by the CEO, as shares have since regained over half their losses from the March low.

You can see how the move has played out in the year-to-date chart below.

Tech ETFs Performance
Data Range: 1/1/2018 – 4/18/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

 

While we won’t know for sure what lessons can be learned from this episode until a little more time has passed, here’s what we’ve learned so far.

1). #DeleteFacebook Worked…Somewhat

One of the key differentiators between this story and others before it is the user response, specifically the #DeleteFacebook movement. While the logic of a social media movement to delete a social media app is a little specious, it has reportedly caused an estimated 9 percent of users to terminate their account, with 17 percent of those surveyed saying they did delete the app from their phone, but not their account.

Those estimates may not prove to be a big deal, with some estimates amounting the revenue lost to a meager $1.7 million. The real test will be to see what Facebook says about its Monthly Active User (MAU) and Daily Active User (DAU) count in its earnings report on Wednesday, April 25, both for the first quarter and going forward.

2). Data Is Less Important Than Metadata

In his testimony to Congress, Mark Zuckerberg was very clear that the content that users put on Facebook is their own, and they can choose to keep Facebook from collecting information about specific items or interactions. However, regardless of how a user sets up these preferences, Facebook is still permitted to collect data on the user’s habits on the platform. This metadata is, in fact, what Facebook’s advertising clients are really after.

It’s this kind of metadata that Cambridge Analytics acquired and used to target potential voters, and it’s the kind of metadata on its users’ activity that the Facebook app may have been collecting directly from user’s cell phones.

How Facebook handles this situation could in turn influence how today’s online behemoths, mainly Amazon, Google, and Apple, deal with this issue. These four companies make up almost 33% of the benchmark index for technology ETFs TECL and TECS.

Value judgements aside, Facebook, so long as it’s unencumbered by regulation or competition, will go on doing what it can to profit from dominating the online advertising ecosystem. Following the Cambridge Analytica scandal and several other controversies related to data collection and content curation, the European Union have implemented transparency guidelines to protect users and inform them about the ways in which their information is collected. U.S. politicians have voiced interest in similar steps, and Facebook has offered to extend the E.U. guidelines to all of its users. However, given the size of its operations and the novelty of the data being harvested, user privacy concerns will likely persist in some form. Until the time that users leave the platform en masse or the government steps in, expect Facebook to continue to leverage its ubiquity however it pleases.

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Performance (as of 3/31/2018)

Ticker Fund Name   1 Mo % 3 Mo % YTD 1 Yr % 3 Yr % 5 Yr % S/I Inception Expense Ratio %
(Gross/Net)
TECS Daily Technology Bear 3X Shares  NAV 8.71 -14.70 -14.70 -54.06 -48.17 -48.06 -52.55 12/17/08 1.29 / 1.10
Market Price 8.16 -14.72 -14.72 -54.14 -48.16 -48.11 -52.56
TECL Daily Technology Bull 3X Shares  NAV -12.68 2.22 2.22 71.23 48.87 52.51 48.09 12/17/08 1.09 / 1.09
Market Close -12.78 1.99 1.99 71.04 48.79 52.49 48.12
* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. The Funds’ adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with each Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September 1, 2019, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s average daily net assets (excluding, as applicable, among other expenses, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses). If these expenses were included, the expense ratio would be higher.
 
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment. The Direxion Shares ETFs are not designed to track their respective underlying indices over a period of time longer than one day.