FAANG stands for five very successful tech companies that can move the stock market — here's what to know about investing in them
- FAANG is an acronym that stands for five major, highly successful US tech companies: Facebook, Amazon, Apple, Netflix, and Google.
- Comprising 15% of the S&P 500, FAANG stocks' performance has a substantial effect on the overall market.
- Investors can buy FAANG stocks individually or via tech industry-focused funds.
If you follow the financial or business news, you may have seen or heard the term FAANG thrown around. No, it's not a misspelling of an animal's tooth. It's an acronym that stands for five big companies — some might say the big companies — in the high-tech industry.
The FAANG quintet consists of:
- Amazon
- Apple
- Netflix
These corporations — all American, but with a global presence — are not only household names, they're financial behemoths. Their combined market capitalization is over $4 trillion. The blue-chip stocks of the tech sector, they collectively make up 15% of the Standard & Poor's 500 (an index of the largest public companies in the US). So they represent not only one of the US' most significant industries, but a sizable chunk of the US stock market itself.
The origins of FAANG
FAANG actually began as FANG. The origin of the acronym has been attributed to Jim Cramer, the financial TV host and co-founder of The Street.com. Known for his slangy abbreviations and catchy phrases, Cramer coined the term in 2013 to represent four tech stocks with outsized market appreciation. Cramer believed that these companies belonged together because they are all high growth stocks that share the common threads of digitization and the web.
Cramer's original term was just FANG — it didn't initially include Apple. The company joined the ranks in 2017, reflecting the growth of internet services (iCloud, Apple Music, Apple Pay) to its revenues. So the acronym became FAANG.
And it's remained so, even though Google's official corporate name is now Alphabet.
The five stocks of FAANG
They need no introduction: The five stocks of FAANG are all familiar brands, whose products and services permeate our lives daily. They are also American corporate success stories — each has seen its stock shares experience triple-digit growth since 2015, and year-to-year as well.
- Facebook (FB) is the social media maestro, owner of Instagram, WhatsApp, and its namesake website. It has returned more than 41% from Oct 28, 2019, to Oct 28, 2020, and more than 162% since Oct 28, 2015.
- Apple (AAPL), the sole product manufacturer of the group, has returned more than 82% over from Oct 28, 2019, to Oct 28, 2020, and more than 272% since Oct 28, 2015.
- Amazon (AMZN), the world's largest e-store, has returned more than 79% from Oct 28, 2019, to Oct 28, 2020, and more than 405% since Oct 28, 2015.
- Netflix (NFLX), the superpower of streaming, has returned 72% from Oct 28, 2019, to Oct 28, 2020, and 348% since Oct 28, 2015.
- Google — parent company Alphabet (GOOG, GOOGL) —has a name synonymous with internet searches and services. Its GOOG shares have increased by more than 20% from Oct 28, 2019, to Oct 28, 2020, and over 113% since Oct 28, 2015.
Just to put these numbers in context: the S&P 500 has grown 57% in the last five years. So FAANG stocks have been at the forefront of the longest bull market in US history, significantly outperforming the overall market.
What is the significance of FAANG?
For investors, the tech sector has become increasingly important as a wave of high-technology companies have recently gone public through initial public offerings (IPOs) or SPACs. Tech stocks are now the go-tos if you want capital appreciation in your assets — and be in on the next big thing.
While the FAANG stocks are fairly mature companies, they still seem to have a great capacity for growth. They dominate the technology-oriented Nasdaq Composite Index. And the fact that they account for roughly 15% of the S&P 500, a bellwether for the entire stock market, means their performance often heralds trends in the US economy as a whole.
How to invest in FAANG
There are several ways to sink your investment teeth into FAANG.
- Individual stocks: Facebook, Apple, Amazon, Netflix, and Google (Alphabet) all trade individually on Nasdaq. You can buy all five, creating your own little FAANG portfolio. Bear in mind that these companies have all been discovered — and their stocks are pretty expensive: hundreds and even thousands per share.
- Tech Funds: No mutual fund or exchange-traded fund (ETF) is solely devoted to the FAANG group. But any technology-focused fund is bound to include them: Look for those that invest at least 80% of their assets in stocks. Some of the top returning ETF funds include iShares Expanded Tech Sector ETF (IGM), NYSE Technology ETF (XNTK), and Invesco QQQ Trust (QQQ). BMO Capital Markets also offers a FANG+ exchange-traded note (FNGS), which tracks an index composed of the group, plus five other tech stocks like Alibaba and Twitter.
- Index Funds: Given their financial prominence, the FAANG five will be weighted heavily in many broad-based market index funds, like the First Trust Dow Jones Internet Fund (FDN), or one that tracks the Nasdaq Composite Index (IXIC).
The financial takeaway
The FAANG gang is viewed by many as modern-day blue-chip stocks, not just tech companies. Facebook, Amazon, Apple, Netflix, and Google are firms that retail investors know and interact within their daily lives.
FAANG stocks have done well over the last several years, often beating the standard indexes. They also led the stock market's rebound during the Covid-19 pandemic in 2020. While historical growth isn't a clear predictor of future growth, it does appear these tech stocks will continue to have a broad influence over the market in general, given their substantial presence in the S&P 500.
However, these stocks are expensive, trading for more than $100, sometimes even $1,000, per share. An alternative option for investors is to find the next high-growth, market-moving stocks.
Given the influence of tech across industries and the recent string of IPOs, maybe there will be a new acronym in the near future.