The term FAANG stocks gets tossed around a lot these days. They cover it on TV. We read about it in the news. We hear our friends talk about it. Even our children are familiar with the term! So, what does it mean, and is there any reason why we should care?
Simply put, FAANG is an acronym for some of the most active and biggest market cap stocks in the Nasdaq-100 Index (NDX). Namely, these stocks are Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX), and Google (GOOG). While the FAANG stocks get a lot of coverage due to the catchy acronym (plus the fact that many of us are actual customers or users of these companies), the truth is traders can relatively easily track the performance of FAANG stocks by simply following the NDX 100 index.
The NDX includes 100 of the largest domestic and international non-financial companies that are listed on the Nasdaq Stock Market. The index itself is rather tech heavy since beyond the FAANG stocks it also includes other big tech names like Microsoft (MSFT), Intel (INTC), and Nvidia (NVDA). However, the NDX also includes other major industry groups like biotechnology, telecommunications, and retail/wholesale trade.
So, does the NDX have any teeth? In today’s world of passive investing where traders tend to look at broad market indexes, having a specific index that caters to a particular trader’s interests can be a valuable tool. It has become almost customary when discussing the markets for traders to focus on the S&P 500 Index (SPX). The SPX is an index that includes 500 of the largest market cap stocks that are listed on either the Nasdaq Stock Market or the New York Stock Exchange. Interestingly, all of the FAANG stocks are included in both the NDX and SPX indexes. However, because of the way the indexes are constructed, the performance of the two different indexes is quite different.
To truly understand the value of considering the NDX versus the SPX, let’s compare the performance of the two indexes over the course of the last 6 months:
Source: OptionsHouse by E*TRADE
As you can see, even though both the NDX and SPX indexes include the FAANG stocks, over the course of the last 6 months, the NDX has increased 9 percent while the SPX has only increased 4 percent. To any trader, that’s a pretty significant difference.
One of the big reasons for the difference in performance is that the FAANG stocks have a greater weighting, and therefore impact, on the NDX than they do on the SPX. And that is exactly why traders should be paying close attention to the NDX along with the SPX.
If you are a trader that focuses on a tech heavy portfolio, or you just want to get a clearer picture of what’s going on with Facebook, Apple, Amazon, Netflix, and Google in the markets, then having the NDX index as a tool in your trading arsenal is important. You have the opportunity to track the market according to your interests. Plus, you’ll be further in the know when everyone is talking about FAANGs around the coffee machine at work, or at the dinner table with your children, as the case may be.