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FAANG: Taking a Bite Out of the Equity Market

You’ve heard a lot about it. But what exactly is FAANG? Could it eventually bite you?



FAANG is not a romantic vampire novel, nor some fancy Florida snake farm. It’s an acronym for a quintet of US tech companies driving markets: Facebook, Apple, Amazon, Netflix, and Google’s parent company, Alphabet. They have contributed heavily to market performance recently (FIGURE 1). However, some question the long-term sustainability of these returns. They point to concentration risk in cap-weighted indices, such as the S&P 500 Index,1 and a potential FAANG bubble thanks to possibly overinflated valuations (FIGURE 2). While FAANG could continue driving strong returns, make sure your exposure is intentional. 

 

FIGURE 1

FAANG Stocks Dominate (% returns as of 4/30/20)

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Data Source: S&P Capital IQ; Calculations: Hartford Funds, 4/20. Past performance does not guarantee future results.

 

FIGURE 2

Too Much of a Good Thing?

FAANGs are becoming a bigger part of the S&P 500 Index. Their valuations, as measured by their price/earnings (PE) ratios,2 have generally been higher than the Index’s. 

  2012 2013 2014 2015 2016 2017 2018 2019 2020*
% FAANG Weighting in S&P 500 Index 6.2 6.5 6.9 8.9 8.8 10.8 11.4 12.8 15.5
FAANG P/E Ratio 15.7 22.6 22.0 22.9 23.9 32.3 22.0 31.5 33.6
Average S&P 500 Index P/E Ratio 16.5 18.3 20.2 23.5 23.5 24.5 19.0 23.4 23.8

Data Source: Factset, 4/20. FAANG P/E Ratio is calculated using a weighted average.

*2020 data is through 4/30/20.

Talk to your financial professional today to make sure your portfolio isn’t overly concentrated in a handful of stocks. 



1 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. Indices are unmanaged and not available for direct investment.

Price/earnings (P/E) is the ratio of a stock’s price to its earnings per share.

Investing involves risk, including the possible loss of principal.

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