It is no secret that the strength of the hottest tech stocks really carried the market’s water over the last year or so. The so-called FANG stocks, in any of a number of iterations, outpaced the major indices and by some measures now account for a whopping 46% of the market value of the Nasdaq-100 index. No matter what these stocks do, it will greatly impact the NDX, the Nasdaq Composite, the Standard & Poor’s 500 and any technology-based exchange-traded fund.
Since they were hot tickets last year, they did indeed drive the market higher simply by their gains in market capitalization. It’s just math.
Before moving on, I need to define the group. FANG started out as Facebook, Amazon.com, Netflix, and Google. Then Google decided to change its name to silly Alphabet, lord knows why, so now every time we write about it we have to say “Google-parent, Alphabet.” Sorry, not in my blog. I hoist a central digit to you, Google.
Anyway, over time, we added Apple to the mix, creating FAANG. But Microsoft did not go down without a fight so we can say FAANGM. However, since Netflix is really only 1. 75% of the NDX, we can bump it out to leave us with FAAMG. That is what I will carry forward here.
The Performance Thesis
I wondered what the market was doing when not overrun by the performance of the FAAMG group. There were ways to mitigate that with equal-weighted ETFs, such as the QQEW (Nasdaq-100) and the RSP (S&P 500). But when we overlay the cap-weighted and equal-weighted versions they track pretty well.
Could it be that the performance of the big five was so strong that it even showed up in equal-weighted indices?
Next was to actually remove these stocks from the index and see how it charts. I asked my colleague Dave Steckler, a retired investment adviser, stock-market technical analyst and a whiz with the High Growth Stock Investor software package, to create that index for me. He used the OEX (S&P 100) and removed the FAAMGs. The result was still cap-weighted.