Innovation may have become a buzzword of our time, but there is no question that those companies doing it properly are coming out ahead. Particularly those mapping their development to the trends of the future. The top innovation companies have come to be captured under the word ‘FAANG’, originally coined for Facebook, Apple, Amazon, Netflix and Google, now representing many more.
The interest in these companies is such that there is even an index tracking their performance. The NYSE FANG+ Index (FANG+) currently includes Alibaba, Alphabet (Google), Amazon, Apple, Baidu, Facebook, Netflix, NVIDIA, Tesla and Twitter. These are all listed on major US stock exchanges either as shares or American Depository Receipts (ADRs). ADRs are a banking security that represents ownership in foreign companies that aren’t otherwise listed on US exchanges.
Of these names, NVIDIA and Baidu may be less familiar to direct investors. Baidu is a Chinese search engine, sometimes referred to as the “Chinese Google”. NVIDIA is the inventor of the GPU, the General Processing Unit, which, is in effect, the heart of 3D computer graphics and also plays a critical role in artificial intelligence applications.
Together, the FANG+ stocks are valued at more than three times the S&P/ASX 200, 17% of the S&P500 and 9% of the MSCI World.
So, what is it that makes the FANG+ stocks interesting to investors?
A base level of their appeal is holding the companies “you know and already use”. The FANG stocks are used in some way by most of the world. Google for example, has 93% share of the search engine market, while 90% of Fortune 500 companies are using Amazon. There is also the view of exposure to leading technologies, through companies not strictly classified as such.
As global innovation leaders, the FANG companies are also positioned for the future, capitalising from a range of trends from e-commerce to cloud storage to automated devices (including cars). This exposure to major trends may support these companies when markets start to recover from concerns over coronavirus.
If you only consider e-commerce, then it is worth noting that eMarketer estimates e-commerce sales to reach 20% of worldwide retail sales by 2022. Amazon and Alibaba should benefit from this. Or alternatively, the electric vehicle industry is tipped for a compounded annual growth rate of 19.2% from 2019 to 2030 according to Market Industry Reports. This is an opportunity for Tesla, a name already considered synonymous with electric vehicles.
Further to their individual appeal, FANG+ constituents hold interest as an investment group.
The NYSE FANG+ Index has returned a 31.3% annualized total return in the five years to 31 December 2019, as compared to 20.5% for the NASDAQ-100®, 15.1% for the S&P 500® and 9.0% for the S&P/ASX200 Index.
This is shown in the chart below.
Index performance over five years to 31 December 2019
Source: Bloomberg, as at 31 December 2019
Source: Bloomberg, as at 31 December 2019
Investing in FANG stocks
Australians looking to include FANG stocks in their portfolios in the past have either gone with direct shares, actively managed funds or broad index approaches through ETFs.
Investing directly has been popular, if you consider that six of the FANG stocks fall within the top 10 most popular international investments for Australians. Offshore direct shares though can also be an expensive and more difficult option, out of reach for many.
Using funds, be it active or passive, has often been more accessible for investors. In particular, passive funds like ETFs offer ease of use, liquidity and tend to be more affordable than direct ownership or actively managed options.
Those using ETFs can incorporate FANG stocks in a range of ways, two of these are outlined as follows.
One option is by using exposures more broadly to the US market though these may not include all the relevant stocks. For example, an ETF investing in the S&P 500 (which doesn’t include Alibaba, Baidu or Tesla) or the NASDAQ 100 (which doesn’t include Alibaba).
The second, more concentrated approach has only become available to Australians from today. It is with exposure to the NYSE FANG+ Index via the ETFS FANG+ ETF (ASX code: FANG). This is the first Australian ETF to access the NYSE FANG+ Index and was launched today.
Whatever views people might hold towards the individual FANG stocks, there is no question they have transformed our world and continue to hold a major role. They are the leading innovation companies of our time and uniquely positioned in the trends shaping life as we know it.
Techjury.net, December 20192.
Amazon.com, December 2019
Electric Vehicle Market – Global Industry Analysis, Size, Share, Growth, Trends and Forecast, 2019-2030. Market Industry Reports.
Source ICE Data Indices, LLC, is used with permission. “NYSE® FANG+TM” is a service/trade mark of ICE Data Indices, LLC or its affiliates and has been licensed, along with theNYSE® FANG+TM Index (“Index”) for use by ETFS Management (AUS) Limited in connection with ETFS FANG+ ETF (FANG) (the “Product”). Neither ETFS Management (AUS) Limited, ETFS FANG+ ETF (the “Trust”) nor the Product, as applicable, is sponsored, endorsed, sold or promoted by ICE Data Indices, LLC, its affiliates or its Third Party Suppliers (“ICE Data and its Suppliers”). ICE Data and its Suppliers make no representations or warranties regarding the advisability of investing in securities generally, in the Product particularly, the Trust or the ability of the Index to track general market performance. Past performance of an Index is not an indicator of or a guarantee of future results.
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Information current as at 2 March 2020