This article was originally published on ETFTrends.com.
The famous FAANG quintet of Facebook Inc. (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), Netflix, Inc. (NASDAQ: NFLX) and Google parent Alphabet Inc. (NASDAQ: GOOGL) account for an increasing percentage of the Nasdaq Composite and that dominance is worrying some market observers.
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“While many parts of the market have experienced a rise in price volatility in recent months, it has largely been a one-way street for the tech darlings of Wall Street: Apple, Facebook, Amazon, Netflix and Google, also known as FANG + Apple, have grown their collective market value by more than 40% in the past year to $3 trillion, and now accounts for a staggering 25% of the Nasdaq Composite,” reports ZeroHedge.
As for the PowerShares QQQ (NasdaqGM: QQQ), which tracks the tech-heavy Nasdaq-100 Index, that ETF also features significant FAANG exposure. The ETF allocates 61.22% of its weight to the technology sector. In order, Apple, Amazon, Facebook, Alphabet and Netflix combine for over 37% of QQQ's weight.
There are advantages and drawbacks to an ETF featuring such large exposure to a small amount of stocks.
ETF Advantages and Drawbacks
Amazon, Facebook and Google are widely held by hedge funds, but if those fund managers decide to depart those names in significant fashion, ETFs would be punished in the process. On the other hand, fundamentals have been supporting upside in these large- and mega-cap technology stocks.
“To be sure, for now the fundamental upside story has dominated, and investors have been attracted to those stocks for good reason: Amazon’s revenue ballooned 31% to $178 billion last year - despite razor thin margins - while Netflix is expected by analysts on average to more than double its net income,” according to ZeroHedge. “Furthermore, the expected interest rate hikes by the Fed, the first of which is due this Wednesday, may not have as strong an effect on technology companies, which generally rely less than other kinds of companies on debt, providing some additional shelter from the storm. Ironically, it would only make this sector even more concentrated, and even more prone to a sudden crash.”
The rapid growth has also contributed to the technology segment’s bigger prominence in the U.S. equity market. The Nasdaq-100 from year-end 2012 to 2017 has substantially increased in market capitalization to $6.5 trillion from $3.1 trillion and saw earnings expand to $204 billion from $137 billion.
For more news and strategy on the Technology market, visit our Technology category.
Tom Lydon’s clients own shares of QQQ, Apple, Facebook and Microsoft.
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