FAANG earnings week for any quarter is watched with scrutiny. And it’s no wonder given that 15% of the S&P is made up of seven major tech companies.
But the last quarter of 2020 and the first quarter of 2021 pointed to a fact no one really wants to acknowledge: the “great rotation” of investor dollars out of tech and into value stocks may be well underway.
GOOGL and FB reported on Tuesday. Both companies smashed estimates with GOOGL shares soaring today. Ad revenues for Alphabet were up 32% YoY.
While these may seem like big moves, analysts agree these are average earnings reactions relative to what The Street has seen over the past five years.
Each company that’s part of the FAANG has their set of regulatory baggage (AMZN with antitrust, FB and GOOGL with privacy), volatility, and potential setbacks on revenue and growth which potentially spooks investors who want to own individual shares.
Where do interested parties turn to if they want FAANG exposure but want to mitigate risk?
FAANG ETFs!
Financial advisors just like you are wanting to know which type of ETF will give their clients exposure to the top tech stocks while spreading the potential downside risk out. Check it:
Invesco QQQ: The “triple Qs” is an ETF no brainer, specifically for investors who want FAANG exposure while still mitigating any risk.
The Qs have a heavy allocation of technology companies, and to quote RUN DMC, can get ‘tricky’ specifically when there is a ton of volatility.
With that said, Shares of QQQ have surged 90% over the past year, and big inflows have made it the fifth largest U.S. ETF by market cap, according to Forbes. The ETF is trading at around $300.
One potential alternative (but also highly speculative) is the TQQQ or Proshares UltraPro. It’s a leveraged ETF that follows the same index.
What does that mean? It takes on debt and more advanced techniques to triple the daily returns of the Nasdaq 100. That’s great when things are heading higher, but over the long-run, it can lose money from the cost of the leverage as well as mathematical quirks associated with daily rebalancing.
FNG: OK so check this out: as of 2019, there was not a dedicated FAANG ETF.
Everything changed when AdvisorShares New Tech and Media ETF (FNG) came to the party. The ETF (according to AdvisorShares) is “designed to invest in the companies that are driving economic growth in the modern era, and can adapt to changing leadership by maintaining the ability to invest in the next generation of technology and media companies leading the equity markets.”
To put it simply: this ETF doesn’t just focus on the GOOGL, FB, AMZN, NFLXs of the world, it also has holdings in MSFT, BABA, and NVDA.
NDX: This ETF looks at the 100 largest and international non-financial companies listed on the NASDAQ. The index tracks companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology.
So while this index has *some* FAANG exposure, it takes a more global approach and diversifies its sectors.
One thing it does not contain: securities of financial companies.
According to an analyst note, the NDX methodology is great when names like Amazon, Apple and Microsoft, among others, are firing on all cylinders. However, NDXE (it’s cooler little rock star sister) is the equal-weight benchmark that offers investors the dual benefit of reduced concentration risk and increased exposure to smaller stocks.
Hot take:
Investors can get FAANG exposure by not having to invest in specific FAANG equities.
Exposure to FAANG stocks by way of ETFs come in different forms with different ways to mitigate risk.
While FAANG stocks represent 15% of the S&P, there are ETFs out there that cover a broader base of companies within different sectors. That way if a company within the FAANG group misses on earnings, your whole portfolio doesn’t blow up.
Questions from your clients:
- Can you receive dividend payouts on your ETFs?
- Can you trade options on your ETFs?
- How much is the chip shortage going to impact FAANG companies?
- What type of tech companies come close to the market cap of specific FAANG companies?