What it means
FAANG is an acronym made of the first letters of five companies. It grew out of an earlier four-company label, FANG, and added Apple to cover the other major consumer technology name.
Commentators on television and in the press used it to talk about the leaders of the technology boom. The group matters because these companies became very large and very influential in stock markets.
Their share prices moved the main indexes, and their results were closely watched as signs of the health of the technology sector. When one of them reported surprising earnings, the effect could spread to hundreds of other shares.
Investors used FAANG as a convenient basket. A fund or investor could buy all five to bet on growth in digital advertising, devices, online shopping and streaming.
Some exchange-traded funds (funds that trade like shares) were later built around similar lists, though they typically use their own rules for which companies to include. The label has limits.
The companies have very different business models and risks, so owning all five is not the same as owning a broadly diversified portfolio. A group built from a single sector and country is also exposed to shared risks, such as changes in regulation or a drop in technology valuations.
Another problem is that the acronym is out of date as companies change names and others rise in value. Many people now use broader terms to describe the largest technology companies.
The word FAANG is best treated as history and as a way to understand older articles and market talk. For a business reader, the lasting lesson is about concentration and storytelling.
A catchy label can make a group of different companies look like one trade, which encourages crowd behaviour. When you hear a nickname like this, look through it to the individual earnings, cash flows and valuations underneath.
In practice
Real-world examples.
Example
A retail investor wants exposure to technology and buys one share in each of the five companies in equal dollar amounts. A year later she sees that the five have performed very differently and realises she has five separate bets, not one.
Example
A fund manager is judged against an index that holds a heavy weight in FAANG. If he holds none of them, his results will look very different from the index, even if his picks are sound. He explains this tracking difference to clients each quarter.
Example
A business journalist reports that the stock market is up 4% but the average stock is up only 1%. The explanation is that FAANG shares, being the largest, rose far more than the rest. The article gives readers a more accurate picture of the market.
Formula
Calculation
Contribution to index return = weight in index x return of the group
These figures are hypothetical. Suppose the five FAANG stocks make up 20% of an index and rise 15% over a quarter, while the other 80% of the index rises 2%. FAANG contribution = 0.20 x 15 = 3.0 percentage points. The rest contributes 0.80 x 2 = 1.6 percentage points. Total index return = 3.0 + 1.6 = 4.6%, so about two-thirds of the gain came from the five stocks.Case study
Seen in the real world.
Riverbend Wealth is an illustrative, fictional advisory firm. A client, Marcus, asked to put 40% of his savings into FAANG stocks after reading a headline about strong returns.
The adviser built a simple chart showing that in a hypothetical bad year, a 30% fall in those five stocks would cut Marcus's savings by 12%. Marcus had said he needed the money for a house purchase in three years, so a loss of that size could delay the plan.
In this fictional story Marcus agreed to cap the holding at 10% and put the rest into diversified funds and cash. The lesson is that a popular nickname does not change the basic rule that concentrated positions carry concentrated risk. The adviser also wrote down the conversation and the agreed cap in the client file, which is good practice whenever a client asks for a position that is larger than the plan suggests. A year later Marcus said the chart had changed how he thought about the choice, because he could see the cost of being wrong in dollars.
Watch out
Common mistakes.
- Treating FAANG as a diversified investment, when it is five companies in one sector and country.
- Assuming that past strong returns of the group will repeat in the future.
- Using the term as if the list were still current, when company names and rankings have changed.
Questions
People also ask.
What does FAANG stand for?
It stands for Facebook, Amazon, Apple, Netflix and Google.
Why was Apple added to FANG?
Apple was added to include another leading technology company and to reflect the group's importance in consumer devices.
Is FAANG an index?
No, it is a nickname, though some funds and indexes have been created to track similar groups of companies.
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