Investing in FAANG Stocks
These five companies drive much of the stock market’s movements
If you are an investor, it helps to be familiar with the major companies that drive the performance of the overall stock market.
Certain companies, due to their size and influence, can play an outsized role in the returns of the broader market. In particular, Facebook, Amazon, Apple, Netflix, and Google (listed under Alphabet, its parent company) are seen as hugely influential and are known as the FAANG companies.
Anyone who has invested in the FAANG companies over the years may have made a lot of money. And given their market capitalization, it’s likely that most investors have some exposure to these firms even if they do not directly own shares.
The term “FAANG” gained popularity from famed CNBC anchor Jim Cramer (he originally referred to only FANG, leaving out Apple from the list). Cramer credited the term to Bob Lang, a technical analyst that he once worked with.
Over the years, FAANG has referred specifically to five companies, but also may generally refer to high growth stocks in the technology and consumer discretionary sector.
Why FAANG Stocks Matter
FAANG stocks are worth paying close attention to, even if you don’t invest in them directly. That’s because they make up a significant portion of the total market capitalization of the stock market, and their price movements can have an impact on the market as a whole.
The value of the U.S. stock market has been pegged at more than $31 trillion. That’s up from $10.7 trillion in 2001 before Netflix and Facebook were public.
As of 2019, FAANG stocks are collectively worth more than $3 trillion, suggesting that these companies comprise at least one-tenth of the U.S. stock market value.
The S&P 500, which includes the 500 largest U.S. companies by market capitalization, features four of these firms—Apple, Amazon, Facebook, and Google—in the top 10. (Microsoft ranks first, while Berkshire Hathaway ranks fifth.) And the S&P 500 notes that the top 10 companies in the index comprise more than 20% of the index’s total value.
Any mutual fund or exchange-traded fund (ETF) that seeks to broadly track the S&P 500 will likely be heavily invested in FAANG stocks. For example, the Vanguard 500 Index Fund, which seeks to mirror the returns of the S&P 500, invests about 12% of the entire portfolio in the five FAANG stocks.
Thus, it’s easy to see how the movement of these stocks can impact the returns of the overall stock market.
The company went public in 2012, eight years after being founded, and has grown to be the world’s largest social media platform. As of 2019, Facebook has more than 2 billion active users. It has expanded its products through acquisitions of Instagram, Oculus VR, WhatsApp, and more.
While Facebook’s initial public offering was a disappointment to some, and the company has faced scrutiny over its privacy practices the company’s share price has seen a rise in value over the years. Shares have more than doubled in value since the start of 2015.
The company started out selling books online in 1995 and now, it’s the world’s largest online retailer. In addition to being a hugely disruptive force across the retail sector, Amazon is a leader in cloud computing solutions through its Amazon Web Services (AWS) unit, online streaming of music and movies, and even consumer electronics with the creation of the Kindle, Kindle Fire, and Echo devices.
Investors may have once been impatient with Amazon because it was slow to turn massive profits, but that’s no longer the case. Investors have been rewarded with profitable returns as Amazon’s stock price has tripled since the start of 2016.
This is the old veteran of the FAANG group, with a history that goes back to the emergence of the personal computer in the 1970s and 1980s. Now, the company still makes computers but it also makes nearly half of its money from smartphone sales. It also generates revenue from apps, streaming music, cloud storage, smartwatches, and released a streaming television service in 2019. Share prices of Apple have more than doubled since the start of 2016.
In some ways, Netflix is the outlier of this group, as its market capitalization is smaller than the other FAANG firms. But its rapid growth in subscribers and its disruption of the video rental and television business have made it one of the most influential companies on Wall Street.
Netflix went public in 2002 as a much different company, offering a subscription service to rent DVDs by mail. It gradually shifted to streaming movies and then introduced original content. It now has over 150 million subscribers who are willing to pay between $8.99 and $15.99 per month for its streaming service.
Netflix is spending a lot on programming, so massive profitability may still be a ways off. And while the company has seen rapid growth in subscribers, it did report a loss in subscribers during the first half of 2019. Nevertheless, investors have been rewarded, as shares have just about doubled since the start of 2017. Volatility may be a concern; shares rose rapidly during the first half of 2018, for example, before settling back down by the end of the year.
Google, Alphabet (GOOGL)
Alphabet is the parent company of Google, the world’s most popular search engine. It’s now also a maker of a smartphone, and has a wide range of investments in everything from self-driving car technology, to smart cities, to biotech through its venture capital arm, GV. It also owns YouTube, one of the largest social media platforms behind Facebook.
Investors who got in early with Google will have made out well, and even those who didn’t get in right away may still have profited handsomely. Shares have more than doubled in value since 2015.
How to Invest in FAANG Stocks
Each FAANG company is listed on the New York Stock Exchange (NYSE) or the NASDAQ, so purchasing shares of each company is a straightforward process for most investors. The easiest path is through an online brokerage account with companies such as E-Trade, Fidelity, TD Ameritrade, or Robinhood.
It’s worth noting that FAANG stocks aren’t cheap. A single share of Google, for example, sells for well over $1,000 and Amazon traded above $1,500 for most of 2019.
If you find yourself priced out of FAANG stocks, or prefer not to own individual shares of the companies, you can get exposure to them through many mutual funds and ETFs. Any index fund tracking the S&P 500 or broader stock market will most likely have holdings in FAANG stocks. Large-cap funds and funds focused on the tech and communications industries will bring similar exposure.
Nasdaq: 3 FAANG Stocks Rising in 2019
Federal Reserve Bank of St. Louis: Wilshire 5000 Full Cap Price Index, Accessed Nov. 21, 2019
S&P Global: S&P 500 Index. Download "fact sheet." As of Nov. 21, 2019.
Vanguard: Vanguard 500 Index Fund Investor Shares, based on 11/20/2019 percentages.
Facebook: Designing for 2 Billion
Federal Trade Commission: FTC Imposes $5 Billion Penalty and Sweeping New Privacy Restrictions on Facebook
SEC: Amazon, Inc. 10K
Robinhood: AMZN, Prices as of Nov. 21, 2019.
Apple: Apple TV Plus
Netflix: About Netflix
Netflix: FQ2 2019 Earnings Call Transcripts
YouTube: About YouTube
Robinhood: Alphabet, As of Nov. 21, 2019
Bloomberg Quotes: Amazon, As of Nov. 21, 2019
Vanguard: Vanguard S&P 500 Growth ETF (VOOG)