The FAANG stocks are a collection of five high-value securities in the tech sector and some of the most valuable shares traded on the U.S. exchanges. Together they are Facebook, Amazon, Apple, Netflix and Google. The stocks in the FAANG acronym, originally coined by Jim Cramer of “Mad Money” and TheStreet.com, make up a hefty plurality of the S&P 500’s value and are attractive to investors.
What Are FAANG Stocks?
The companies in the FAANG stocks have enormous value. In fact, when adding Microsoft to FAANG, the six companies together make up approximately 20% of the entire value of the S&P 500. However, these stocks don’t just constitute disproportionate value. They are also considered innovators and leaders in their respective fields. Each stock in the FAANG acronym has either invented or defined its respective field, from social media and search engines to the era of the smartphone ushered in by Apple. (Despite an ongoing debate among investors, innovation is generally cited as the reason for leaving Microsoft out of FAANG.)
This has made FAANG stocks hugely popular among investors, who see the companies’ successes as not merely a short-term bubble or window of time. These companies are both some of the largest firms in the world and market leaders in their respective spaces. Many investors and fund managers, then, consider these as “best-of-both-worlds” assets, providing the value of a long-established companies and the potential of startups.
Investing in FAANG Stocks
First of all, for better or worse, if you are invested in the stock market you’re probably already invested in one or more of the FAANG companies. As noted above, this handful of corporations makes up a plurality of the value of the S&P 500. Any market fund — whether mutual or exchange-traded — indexed to this metric will move to a very large extent based on the changes in the FAANGs’ value. (The Dow Jones Industrial Average, on the other hand, will not, as the FAANG stocks are all traded on the Nasdaq Stock Exchange.)
For a retail investor, it may be costly to invest directly in FAANG stocks due to their high price. The same success that makes these appealing assets to large, institutional investors can also put them beyond the reach of many individuals. Near the end of the third quarter of 2020, Apple was the cheapest of the group, trading at $108.94 at time of writing. Alphabet (Google) traded at $1,421.80, more than 10 times that value, while Amazon’s stock cost $2,933.41 for each share.
While these stocks tend to enjoy solid growth, this makes them generally poor choices for investors who can only afford to purchase a handful of shares. A portfolio’s growth is based on the “delta,” the amount by which its shares change multiplied by the number of shares in the portfolio. An individual with $10,000 to invest can either buy 1,000 shares of a $10 stock or three shares of Amazon. If both shares go up by $10, the investor will have doubled his money on the cheap stock but will have made only $30 off Amazon.
As a result, there are generally three good ways to invest in FAANG stocks for individuals:
- NASDAQ composite index funds – By investing in funds indexed to the NASDAQ overall you gain significant exposure to the FAANG companies. At time of writing, six companies made up half of the entire value of this market: Apple, Microsoft, Amazon, Alphabet (Google), Facebook and Tesla. Netflix may not be on that list, but this is a dominant profile nevertheless.
- FAANG-indexed exchange-traded funds – This is probably the best way to approximate buying and selling FAANG stocks. You can purchase exchange-traded funds (ETF) as you would stocks, buying and selling them on the market throughout a trading session. However, they are built like mutual funds, with each representing a portfolio of assets. Buying into an ETF built around the FAANG companies will give you exposure to their growth without having to pay the exorbitant prices for their shares.
- FAANG mutual funds – Finally, you can also invest in mutual funds built around FAANG shares. As with an ETF, this will give your portfolio exposure to the growth experienced by these five companies without having to pay the significant per-share prices. It will come with the reduced volatility that mutual funds tend to be known for but also the trading restrictions typically associated with mutual fund products.
The Bottom Line
The FAANG stocks are five of the highest-value tech stocks in the world. They are Facebook, Amazon, Apple, Netflix and Google (Alphabet), and investors love them. They are available as individual shares, in mutual funds or exchange-traded funds. Further, they are common in 401(k) plans and other employer-sponsored offerings. Though they tend to have extremely high price-to-earnings ratios investors continue to buy them for their reputation as leaders in their individual industry spaces.
Tips for Investing
- Should you buy into FAANG stocks? Should you buy equities at all? How many should you buy, and how long should you hold on to them? These are all important questions that can powerfully affect your finances. Getting expert advice from a financial advisor is important. Finding one doesn’t have to be hard. SmartAsset’s matching tool can help you find a financial advisor in your area, in minutes, to help you think through these issues and many more. If you’re ready, get started now.
- Tech is an exciting, high-growth field and many investors have gotten rich by sinking their money into it. But that doesn’t mean it’s without risks. Before you start jumping headfirst into the NASDAQ and its high-flying companies be sure to check out our top four mistakes that tech investors should avoid.
Photo credit: ©iStock.com/Thanumporn Thongkongkaew, ©iStock.com/Laurence Dutton, ©iStock.com/teekid