FANG Stocks Live Up to the Hype

Posted by jbrumley on April 25, 2017 11:01 AM

Do you like the idea of 'indexing,' which is simply an investment in the broad market based on faith that it will fare well, given enough time? To that end, indexing in, say a fund like the S&P 500 SPDR Trust (which just tracks the performance of the S&P 500 index), is also a passive acknowledgement that it's difficult to outperform the market, so there's not much point in trying.

Well, as it turns out, your highly-diversified index fund isn't at highly-diversified as you think. It's top-heavy to the point where even the staunchest of indexing fans may want to rethink the philosophy being their strategy. See, not only is it top-heavy, were it not for the very biggest of the big names in the S&P 500, the S&P 500 wouldn't have made the heroic move it did since early November.

FANG Stocks Are The S&P 500

Odds are you've heard the term, but if not, it's a simple explanation. FANG stocks are (collectively) Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOG, GOOGL). Some investors had added Apple (AAPL) to the mix, and understandably so. Apple is the world's biggest company -- at present anyway -- and there's no denying the fates of these companies are inextricably linked.

That's not the interesting aspect of FANG stocks to fans of investing in broad index funds or index-based ETFs though.

As of the most recent tally, the 500 stocks in the S&P 500 collectively sport a market cap of $20.3 trillion. That's a lot. Google (now Alphabet), Netflix and all the other FANG stocks, however, make up a big chunk of that market cap though. Alphabet's current size is a whopping $603 billion. Apple is a $757 billion company. Netflix is only a $64 billion outfit, although it does wield a lot of influence on how investors see the overall market. Amazon is a $434 billion giant. And, Facebook is a $423 billion organization.

Add all those market caps together, and what you get is a total of $2.3 trillion. That's 11.3% of the large cap market represented by just 1% of the market's large cap stocks.

That's the gentle way of saying an investment in the S&P 500 is essentially an investment in those five stocks. Regardless of how the other 495 names 'should' perform, investors are going to take their cue about other stocks based on how those five names perform.

Giving credit where it's due, the top 10% -- the other 45 names that make up the top 50 companies in the S&P 500 -- wield a fair amount of influence. Even then though, those 45 names collectively barely eclipse the market cap of the FANG stocks. The other 450 in the index are not collectively bigger than the top 50 are.

FANG Stocks Save the Day

It's a daunting idea, when one thinks about it. The S&P 500 is supposed to be a diversified basket of stocks, but it's not. It's top-heavy, and consumer technology and tech-based services are over-represented by the group. Investors may not want to complain though. As it turns out, the bulk of the S&P 500's 14% gain since early November has been driven by the index's biggest names, and the FANG stocks in particular. Ditto for the index's 5% gain since the end of last year.

The hard stats: If you take out the results achieved by the S&P 500's biggest 40 names since the beginning of 2017, the S&P 500's 5% gain is whittled down to nothing. The biggest ten contributors to the advance account for half of that 5% gain; that group includes Alphabet and Amazon.

That outsized leadership extends all the way back to early November. Apple shares are up 32% since then. Amazon has gained 20%. Facebook is up nearly 22%. Netflix, though a lower-impact FANG stock, is up 21% since the end of October, versus the S&P 500's 14% gain for the period. The only laggard, surprisingly enough, is Apple, but it's still gained a respectable 12.1% for the period.

About a third of the S&P 500's gain since November is attributable to these top five names, and again, it's arguable that another third of the market's again since then is simply the result of other stocks following the lead of the most prolific stocks.... whether those gains were fundamentally merited or not.

The Takeaway

Point being, you may think you're indexing, but you're not really indexing. For all intents and purposes, FANG stocks are the broad market. That may change in the future, though it's difficult to see Amazon, Alphabet, and Apple losing relevancy and then losing ground anytime soon.

This is why we've developed our new FANG Options Trader Advisory Service, which focuses on the names that are actually moving. This laser-like focus also allows us to learn the nuances of how each of these names moves, allowing us to better time entries and exits. In that these five names are the market's biggest movers, we're able to issue about eight trades a month, with some of them capable of producing gains in excess of 100%. Go here to learn more.

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