What it means
The acronym takes the first letter of each company's name: Facebook, Apple, Amazon, Microsoft and Google. It is a close cousin of FAANG, which includes Netflix but leaves out Microsoft.
Market commentators use FAAMG when they want to focus on the biggest companies by value. These businesses matter to investors because of their sheer size.
Index funds that weight shares by market value (the price per share multiplied by the number of shares) give large companies a bigger slice. As a result, a handful of stocks can have an outsized influence on the performance of a whole index.
For a finance person, this raises the topic of concentration risk. If five names account for a large portion of an index, then an investor in an index fund is more exposed to those five than may be obvious.
A fall in the group can drag the entire index down even when most other companies are doing fine. The companies are not identical, despite the grouping.
Their income comes from different sources, such as advertising, hardware, online retail, cloud services and software subscriptions, and they react differently to economic conditions. Treating them as a single bet hides important differences.
The label is also dated. Company names have changed, new giants have emerged, and the group that matters most in any given year may be different.
Use the term to understand what people mean in conversation, but do not treat it as a fixed list for investment decisions. When you read about FAAMG in a news story, ask what the writer is trying to show: the strength of a rally, the weakness of the broader market, or the risk of concentration.
The answer tells you whether the label is being used for insight or just as a convenient shorthand.
In practice
Real-world examples.
Example
An investor holds a broad index fund and discovers that a quarter of her money is effectively in five technology stocks. She decides to add a fund that holds smaller companies. Her portfolio becomes less dependent on the big five.
Example
A financial journalist writes that the market rose last month, but only because of FAAMG. Without those five, the average stock was flat. The article warns readers that headline index gains can hide weak breadth, meaning few stocks are taking part in the rise.
Example
A pension fund trustee asks the investment manager how much of the fund's equity holding is in FAAMG stocks. The manager reports the figure, and the trustees set a limit to keep exposure within their risk policy.
Formula
Calculation
Group weight in an index = combined market value of the five companies / total market value of the index x 100
These figures are hypothetical. Suppose the five companies have a combined market value of $10 trillion, which is $10,000,000,000,000, and the index as a whole has a total market value of $40 trillion. Group weight = 10 / 40 x 100 = 25%. If the five stocks fall 10% while the rest of the index is flat, the index falls by 25% x 10% = 2.5%.Case study
Seen in the real world.
Maplewood Capital is an illustrative, fictional investment firm that runs a model portfolio for retirees. Its analyst, Tom, noticed that the portfolio had drifted so that five technology names made up 30% of its equity holdings.
He showed the committee that a 20% drop in those five would reduce the whole portfolio by about 6%, before any other changes. The retirees' stated risk tolerance was a worst-case loss of 10% in a bad year, so the exposure used up more than half of the allowance.
In this fictional story the committee set a cap of 20% on any group of related large companies and rebalanced gradually. The lesson is that popular shorthand like FAAMG should prompt a concentration check, not just a discussion of past returns. Tom now runs the same check every quarter and reports the combined weight of the five names to the committee in a single line, so changes are noticed early. He also compares the portfolio's weights with those of its benchmark index, which shows whether the firm is taking more or less of this risk than the market itself.
Watch out
Common mistakes.
- Assuming FAAMG is an official index or fund, when it is only a nickname for a group of companies.
- Treating the five companies as identical, when their businesses and risks differ widely.
- Using an old list of names without checking whether companies have been renamed or restructured.
Questions
People also ask.
What does FAAMG stand for?
It stands for Facebook, Apple, Amazon, Microsoft and Google.
How is FAAMG different from FAANG?
FAANG includes Netflix and excludes Microsoft, while FAAMG swaps those two names.
Why do these stocks matter for index funds?
Index funds weighted by market value hold large amounts of the biggest companies, so their prices strongly affect the index.
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