FAANG is an acronym. It refers to five tech stocks that have led the stock market for years due to their strong profits. The companies are Facebook, Amazon, Apple, Netflix, and Alphabet, which was previously known as Google. These companies had a total market capitalization of more than $4 trillion before the corona virus pandemic hit in January of 2020. Their combined capitalization as of June 2020 is $3.2 trillion which is 14% of the S&P 500.
What Is a FAANG Company?
For many, FAANG is synonymous with Big Tech, although Microsoft, Cisco, Oracle, IBM, Intel, and Samsung are not included in the group. Aside from being good investment opportunities and huge companies, the FAANG have been largely responsible for driving a social media and consumer revolution. Although IBM, Cisco, Intel, Oracle, and Microsoft provide the bricks and mortar for the technological revolution we are undergoing, they are not the driving forces like the FAANG group. Many of them are, however, equally good investment opportunities as are many of the smaller tech companies that dominate their niches.
Why Is Microsoft Not in FAANG?
First of all, there is no certification requirement for being in the FAANG group. The term FANG was coined by Jim Cramer, the popular investing show host with CNBC. Apple was added in 2017 to make the acronym FAANG. Cramer picked the original four as they were totally dominant in their areas. And, although Microsoft has a larger market capitalization than any except Apple (although that varies), it is in many ways a supporter of the recent social media and technological revolution rather than an instigator or leader.
FAANG Bear Market
In late 2018, all five FAANG stocks fell into a bear market. This resulted in an overall loss of $1 trillion before they rebounded to go even higher. This was repeated with an even greater loss at the onset of the Covid-19 pandemic but, again, the stocks have recovered and, in fact, led the market in the first stages of a market recovery. The general consensus is that the social distancing forced upon us by the virus has in many ways benefited these companies. Amazon has thrived as brick and mortar stores were forced to close, Netflix has benefited from folks looking for entertainment during a difficult time, and Google, Apple, and Facebook have benefited from both work and socializing moving almost entirely onto the internet. It would appear going for forward that any FAANG bear market is likely to be short lived.
As the stock market rally continued into the new decade, the recurring predictions of a FAANG bubble bursting continued as well. The fundamentalists in stock investing look at high P/E ratios and predict doom and gloom. The technicians see every tweak of the market as a forewarning of a collapse of these stocks. Nobody expects the companies to go away but many are concerned that their stock prices will not hold up over the long term. To a degree, investors choose these stocks because there are currently no better options. And, because everyone is jumping on the bandwagon, it keeps moving forward. But, so long as these folks keep making money, it is likely that any bubble, such as it is, will not burst any time soon.
FAANG S&P 500
Over the last decade more and more investors have chosen a passive approach. They pick an index fund that tracks the S&P 500 and put their money in using dollar cost averaging. Because the FAANG stocks are such a large part of the S&P 500 they tend to be seen as bellwethers for the market as a whole. Because these stocks are the natural leaders and will continue to be for the foreseeable future, a reasonable question ask is why not simply invest a little in each of these companies and forego the rest of the S&P 500. The rationale for staying with the S&P 500 is that it is a way to diversify your investment portfolio without picking and choosing individual stocks.
FAANG Index Chart
If you are just interested in investing in FANG or FAANG stocks, there is no index fund that contains just these stocks. The closest is the AdvisorShares New Tech and Media ETF but it is actively managed and, although it is top heavy with FAANG, it contains 25 equities. If you look at a FAANG index chart, it is a nice measure of how these stocks are doing as a group but since there is no ETF that tracks just these stocks, such an index chart is of academic interest only. Your better choice is to track the S&P 500 and put your investments there.
FAANG Index Vanguard
Vanguard has several index funds that track tech stocks including the FAANG group. They do not, however, have an index fund that tracks only FAANG nor does anyone else. Part of this is because a fund with only five stocks in barely an index fund but rather a collection of a few stocks. As we noted previously, with this narrow of an approach one would do as well investing equally in each of the member stocks of the FAANG group. It would be easy to use a dollar cost averaging approach so that investments would adjust for the current price of any of the stocks.