GUEST POST BY GAVIN MCMASTER
FAANG stocks have been all the rage for years now, and they have significantly outperformed all major market indices.
Of course, past performance is no indication of future performance, but let’s have a look at how a 5-year investment in FAANG stocks has performed.
What Are FAANG Stocks?
FAANG is an acronym for some of the most popular tech stocks in the market today – Facebook, Apple, Amazon, Netflix and Google (Now called Alphabet Inc.). The term FAANG was coined by Jim Cramer of CNBC's Mad Money in 2013, and is now widely used by market analysts, commentators, and investors.
These stocks have performed so well they have been given their own acronym with an associated cult following.
Let’s take a look at how well an investment in FAANG stocks would have done in the last 5 years.
Starting Point: June 1, 2015
Let’s use a starting point of June 1st, 2015 and assume we invested exactly $100 into each company (in other words, we’ll allow partial shares which can’t happen in reality).
The initial portfolio allocation would look like this:
That gives us a baseline, so let’s see how the portfolio progresses over time.
The first year saw the portfolio perform admirably with a 28.13% gain compared with -0.59% for the S&P 500.
During the next two years, FAANG performance was spectacular, with gains of 40.52% and 53.21% compared to 15.75% and 12.53% for the S&P 500.
The FAANG portfolio stumbled a little in the fourth year, returning -5.94%, with the S&P 500 managing +0.36%.
The final 12-month period saw FAANG take over again with a return of 40.54% to the S&P 500 return of 10.93%.
You can see from the tables below that an investment in FAANG stocks over the past five years significantly outperformed the S&P 500, with AMZN and NFLX being the stand-outs.
It just goes to show that a little goes a long way, and even investors with a small account can achieve investment success.
The million dollar question is, “Will this trend continue?” No one knows for sure, but I thought this table from Charlie Bilello was interesting:
You can see that there are not many companies that remain in the top 2-3 for more than a few decades.
FAANG Stock ETFs
An alternative to directly buying FAANG shares of stock would be to invest in a FAANG stock ETF. FAANG stock ETFs allow investors to invest in FAANG stocks and remain diversified without having to buy tiny amounts of shares.
FAANG stock ETFs are a great option for small accounts.
To qualify as a FAANG stock ETF, an ETF fund must have at least 1% exposure to FAANG stocks. A few examples are QQQ, VUG, and SPYG. Each three of these ETFs has a daily volume in the millions, with QQQ the highest at over $49M in shares traded daily.
SPYG, or SPDR Portfolio S&P 500 Growth ETF, is a large cap growth ETF. It is priced the lowest, making it a great option for smaller investments.
Author Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him at www.optionstradingiq.com.