Investing in FAANG Stocks and ETFs

It’s hard to talk about the general stock market without mentioning one or more FAANG stocks. The tech giants make up a sizable portion of the S&P 500 Index.

That means many investors already have at least some exposure to them. Because the heavy weighting of FAANG stocks in indexes such as the S&P 500 gives them an outsize impact on the broader stock market, it’s worthwhile for investors to learn a bit more about them.

What are FAANG stocks?

FAANG is an acronym used to describe some of the most prominent companies in the tech sector. Originally the acronym was FANG for Facebook (NASDAQ: FB), Amazon (NASDAQ: AMZN), Netflix (NASDAQ: NFLX), and Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) (formerly Google). In 2017, investors started including Apple (NASDAQ: AAPL) in the group, turning the acronym into FAANG.

Over the past decade, the FAANG stocks have grown faster than the overall S&P 500 or the more technology-focused NASDAQ. The original four FANG stocks were all internet-based companies, but the later inclusion of Apple -- primarily a consumer hardware manufacturer -- made FAANG a broader group of technology stocks.

• Facebook owns two of the most engaging and largest social media apps in the world -- its namesake, Facebook, and Instagram -- as well as two of the biggest messaging apps, WhatsApp and Messenger. It makes money by displaying ads to users while they browse through feeds of photos and videos.
• Amazon is the largest business-to-consumer e-commerce company in the world. Its Prime membership program has more than 200 million global subscribers who have proven extremely loyal to the company’s online marketplace. While e-commerce accounts for the bulk of its revenue, Amazon has found profit engines in cloud computing services and advertising.
• Apple is one of the biggest smartphone manufacturers in the world. Device sales account for most of Apple’s revenue, but in recent years the company has also focused on higher-margin subscription services, including streaming music and video, gaming, news, and cloud storage.
• Netflix is one of the first internet-born media companies. In 2007, it started to shift from a DVD-by-mail service to on-demand streaming, and, in 2012, it started investing in its own original content for the streaming service. Today Netflix is one of the biggest buyers of film and television productions in the world, serving more than 200 million global subscribers.
• Alphabet is a tech conglomerate primarily split between Google and its “other bets” segment. While Google started as an internet search company, it’s continued to acquire and develop consumer-facing products, nine of which boast more than 1 billion users each. Google also encompasses a growing cloud computing business and a relatively small hardware business. The “other bets” segment includes Alphabet’s moonshots such as automated-vehicle business Waymo and health researcher Verily.

Are FAANG companies a good investment?

FAANG stocks have historically outperformed the S&P 500 index. As of July 2021, the worst-performing FAANG stock, Alphabet, has returned more than double the index average ​​since the market bottom in March 2009. Meanwhile, Netflix stock is up more than 100-fold, and Amazon and Apple shares are up more than 50x.

The five companies combined account for approximately 17% of the S&P 500 and about one-third of the Nasdaq 100 Index.

As every investor should know, past results don’t guarantee future success. That said, FAANG companies exhibit several competitive advantages that make them appealing long-term investments.

Most of the FAANG companies benefit from the network effect.

• Facebook’s products are valuable to new users because of its billions of other active users.
• Google products, including YouTube and Search, benefit from their billion-plus users.
• Amazon’s Prime service brings tens of millions of shoppers to its marketplace every day, which makes its seller services more attractive to third-party merchants.
• Netflix’s tens of millions of viewers share feedback about what kind of content the company should invest in and provide the revenue to support its massive budget.
• The lock-in effect of the Apple ecosystem creates significant switching costs for iOS users. That advantage is getting stronger as Apple develops more services such as Apple Music and Apple Arcade.

All five FAANG companies have intangible assets that should make them more profitable than their rivals. Facebook, Amazon, and Google have troves of user data they can tap into to target advertisements. Netflix’s move to original content and exclusive licenses makes its content library irreplicable. Apple is one of the few companies that makes both the hardware and the software for its devices -- and it is certainly the only one doing it at its scale.

These competitive advantages can make the FAANG stocks great potential investments. Still, investors may want to examine each stock’s valuation relative to its own historical value and that of comparable competitors before buying.

Can I invest in a FAANG stocks index ETF?

No fund or ETF contains FAANG stocks exclusively. However, the NYSE FANG+ index tracks the five FAANG stocks and five other tech and tech-enabled leaders.

In November 2019, BMO Financial Group issued an exchange-traded note that tracks the FANG+ index. It trades on the NYSE Arca exchange under the ticker FNGS (NYSEARCA: FNGS). Owning it is the simplest way for investors to gain added exposure to the returns of FAANG stocks. The ETN has an expense ratio of 0.58%.

With such a small index, investors may be better off building their own portfolio of FAANG stocks and avoiding the ETN expenses -- especially now that most discount brokers charge no commissions and allow fractional share purchases. Building your own portfolio also allows you to optimize stock purchases and sales for your own unique capital gains tax situation.

FAANG stocks probably already play at least a small role in your portfolio. But if you want additional exposure to these excellent companies, you can buy the FANG+ ETN or simply dedicate a portion of your portfolio to the FAANG stocks themselves.