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.
FAANG Stocks Dominate (% returns as of 4/30/20)
Data Source: S&P Capital IQ; Calculations: Hartford Funds, 4/20. Past performance does not guarantee future results.
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.
|% 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.
2 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.