Market Overview

FAANG Weakness Problematic For Plenty Of ETFs

Share:
FAANG Weakness Problematic For Plenty Of ETFs
Related IYW
3 Tech ETFs To Buy, According To Kevin O'Leary
Don't Get Caught Up In Tech ETF Fears
Market Movers: Tech Earnings (Seeking Alpha)
Related QQQ
Cramer Says 'Nibble' Away At Tech, While Pro Likes Apple
How Anne-Marie Baiynd Is Trading The Market Sell-Off: Fade The Bounces
Market Risk Vs. Market Timing: Case Study (Update) (Seeking Alpha)

Reminding investors that nothing, at least not in financial markets, moves up in a straight line, the fabled FAANG quintet has recently encountered selling pressure.

FAANG membership consists of Facebook Inc. (NASDAQ: FB), Amazon.com, Inc. (NASDAQ: AMZN), Apple Inc. (NASDAQ: AAPL), Netflix Inc. (NASDAQ: NFLX) and Google parent Alphabet Inc. (NASDAQ: GOOG) (NASDAQ: GOOGL).

Fierce FAANG

As of June 9, Apple, Amazon, Facebook and both classes of Alphabet shares represented five of the top 10 holdings in the S&P 500. With the S&P 500 being a cap-weighted index, the dominance of FAANG in the benchmark U.S. equity gauge reminds investors that a slew of exchange traded funds will be affected by any further retrenchment faced by the FAANG stocks.

FAANG “had a bad day on Friday after research notes from Goldman Sachs, Deutsche Asset Management and others warned that these stocks were too expensive. Owning these five stocks, which together accounted for more than 40 percent of the S&P 500’s gains this year before Friday’s sell-off according to an article in this weekend’s edition of Barron’s, are an extremely crowded trade,” said AltaVista Research in a note out Monday.

Weighting by market capitalization is the most frequently used weighting methodology by ETFs and index funds. Advocates of cap-weighted indexes say the strategy gives investors exposure to the “whole market” while detractors say weighting by market value exposes investors to richly valued stocks. Additionally, detractors of cap weighting say the strategy leaves investors vulnerable when asset bubbles burst.

Everyone Has Bad Days

For now, it is not reasonable to say a couple of bad days for FAANG stocks means another tech bubble is coming, but it must be remembered that “as these stocks’ market caps grew, so too did their weight in most of the ETFs that hold them,” said AltaVista.

Alone, Apple accounts for over 17 percent of the iShares U.S. Technology ETF's (NYSE: IYW) weight. IYW's total FAANG exposure is about 38 percent, highlighting why the ETF fell more than 3 percent last Friday. Amazon and Netflix are classified as consumer discretionary stocks, so they are not part of technology ETFs such as IYW.

Those stocks do, however, reside in broader market ETFs, such as the PowerShares QQQ (NASDAQ: QQQ). QQQ's FAANG exposure is about 34.5 percent, according to AltaVista data.

Although Apple is not a member of well-known internet ETFs, the FAANG allocations in those funds are still high. For example, the First Trust Dow Jones Internet ETF (NYSE: FDN), the largest U.S. internet ETF, has FAANG exposure of 32.7 percent.

Related Links:

The World's Hottest Emerging Market Presents A Leveraged Opportunity

An ETF Idea For The Fed Meeting

Posted-In: Altavista ResearchSector ETFs Short Ideas Top Stories Markets Tech Trading Ideas ETFs Best of Benzinga

 

Related Articles (AAPL + AMZN)

View Comments and Join the Discussion!

Phibro Animal Health (PAHC) Rides High on Solid Prospects

MobileIron (MOBL) Catches Eye: Stock Adds 12.3% in Session