- FAANG is an acronym that stands for five major U.S. tech companies: Facebook, Amazon, Apple, Netflix, and Google.
- FAANG stocks' performance has a substantial effect on the overall market and comprises a large chunk of the S&P 500.
- Investors can buy FAANG stocks individually or gain exposure via mutual funds or ETFs.
If you follow financial or business news, you may have seen or heard the term FAANG thrown around. No, it's not a misspelling of an animal's tooth. It's an acronym that stands for five big companies — some might say the big companies — in the high-tech industry.
These particular companies have a big impact on the overall stock market and economy, and some think these particular companies are a better investment choice than smaller competitors. However, just because FAANG stocks are big and popular doesn't mean they are necessarily right for you or that they'll continue to do well in the future.
What are FAANG stocks?
The FAANG stock meaning is simply an acronym for five prominent U.S.-based tech companies:
- Meta (formerly Facebook)
- Amazon
- Apple
- Netflix
- Alphabet (formerly Google)
FAANG actually began as FANG around 2013, as Apple didn't join the ranks until 2017. The origin of the acronym has often been attributed to Jim Cramer, the financial TV host and co-founder of The Street.com. Known for his slangy abbreviations and catchy phrases, Cramer popularized the term to represent four tech stocks with outsized market appreciation. Cramer believed that these companies belonged together because they are all high-growth stocks that share the common threads of digitization and the growth of the web.
The acronym isn't necessarily quite as relevant as it was a few years ago, in part because of name changes — e.g., Facebook became Meta — but also because the market has changed and some think other tech companies are more relevant market leaders.
For example, the term Magnificent 7 is popular now, which includes the FAANG stocks except Netflix, while also including Microsoft, Nvidia, and Tesla. Still, many see FAANG stocks as holding an important role in the market.
Market dominance
These corporations — all American-based, but with a global presence — are not only household names, they're financial behemoths. Their combined market capitalization is nearly $10 trillion, and they account for roughly 20% of the market cap of the S&P 500 (an index of 500 of the largest public companies in the U.S.). So they represent not only one of the most significant industries in the U.S., but a sizable chunk of the U.S. stock market itself.
Growth and innovation
In addition to being large stocks with a large impact on the overall market, FAANG stocks are companies that have shown tremendous growth and innovation over the years. Pre-internet, these companies didn't even exist, and now they're trendsetters. Amazon, for example, has revolutionized e-commerce, and Apple was a major catalyst for the smartphone era. Even Netflix, which doesn't necessarily hold the same sway as the other FAANG stocks, has disrupted the media and entertainment industry, prompting other large companies like Disney, Comcast, and Warner Bros. Discovery to adapt to consumer demand for streaming, which Netflix helped popularize.
Why invest in FAANG stocks?
Investing in FAANG stocks, while not right for everyone, often comes down to factors such as the following:
High growth potential
A big reason why FAANG stocks became popular in the first place is that these stocks gained value very quickly, often surpassing the rate of return for the broader market. While it remains to be seen what will happen in the future, some think FAANG stocks still have great capacity for growth, despite being fairly mature companies.
Portfolio diversification
If you only invest in FAANG stocks, that doesn't give you much diversification as they're all tech stocks, but it's arguably better to invest in all five than just one from a diversification standpoint. That's because these companies largely cover different areas of tech, such as mobile device hardware, social media, and online search. If one part of the economy starts faltering, such as if a consumer demand slowdown hurts Amazon and Apple sales, it's possible that Alphabet, for example, could hold up better if, say, business investment in online advertising and cloud services remains strong.
That said, there's often correlation among these stocks, so you might consider diversifying further with FAANG stocks and other types of investments. That way if the tech industry falters, for example, perhaps investments in other industries like healthcare help balance your portfolio.
Brand recognition and consumer loyalty
The FAANG gang is viewed by many as modern-day blue-chip stocks, not just tech companies. Facebook, Amazon, Apple, Netflix, and Google are brands that retail investors know and interact with in their daily lives. While this does not guarantee success for the stocks, the fact that these are well-known companies with loyal customer bases could potentially limit downside risk, compared with less proven companies that might have a lower floor for revenue and earnings.
Tech leadership
As some of the most prominent tech companies, FAANG companies arguably hold a leadership position that can help lift their stocks. For example, as new technologies like AI emerge, many people are looking at what companies like Alphabet and Apple are doing, which could result in customers using their AI tools ahead of competitors. They also often have the resources in place to adapt to new trends, even if they're not the ones leading the charge.
Individual FAANG stock analysis
Let's take a closer look at individual FAANG stock performance. Keep in mind, however, that past performance is not a guarantee of future results, and you'll need to analyze if/how these stocks fit into your own portfolio.
Meta (Facebook)
Meta (META) is a social media leader, owning networks such Facebook and Instagram, as well as the popular messaging platform WhatsApp. It also has its eyes on future initiatives, such as the metaverse.
Over the past year, as of late October 2024, Meta stock has gained over 95%, and it's up over 205% over the past five years.
Amazon
Amazon (AMZN) is not only a leader in e-commerce, but it also has its hands in a variety of other businesses, such as cloud computing services through AWS, as well as business lines in areas like logistics and payments.
Amazon's stock is up over 51% over the past year, and it's gained more than 112% over the past five years, as of late October 2024.
Apple
Apple (AAPL) is known for its flagship products like the iPhone and Apple Watch, but it also has a robust services business, such as with Apple Music and iCloud, and it's recently been expanding into AI.
Apple stock has gained over 36% over the past year, as of late October 2024, and it's soared over 280% over the past five years.
Netflix
Netflix (NFLX) is one of the most prominent streaming platforms that continues to deepen its library of original content and expand globally. The company is also getting more into areas like live-event streaming and gaming.
Over the past year, as of late October 2024, Netflix stock has jumped over 89%, and it has gained over 168% over the past five years, despite a big downturn during that stretch.
Alphabet (Google)
Alphabet is the parent company of Google (GOOG, GOOGL), but the company is far more than just a search engine. It also has its arms in areas ranging from cloud services to AI to self-driving cars (through the Alphabet subsidiary Waymo).
Alphabet's Class C stock (it also has Class A stock that comes with voting rights, but they trade similarly) has gained over 42% in the past year, as of late October 2024, and it's up more than 164% over the past five years.
How to invest in FAANG
There are several ways to sink your investment teeth into FAANG, including:
Buying individual stocks
Meta, Apple, Amazon, Netflix, and Alphabet (both Class C and Class A shares) all trade individually on Nasdaq. You can buy stock in all five companies, creating your own little FAANG portfolio, or you can choose the ones you are most bullish on. Keep in mind, however, that investing in individual stocks, without proper diversification, can be risky.
Investing in funds
No mutual fund or exchange-traded fund (ETF) is solely devoted to the FAANG group. But many technology-focused funds include them, so you could get exposure that way, while also diversifying with other tech investments.
For example, you could invest in a fund that tracks the NYSE FANG+ index, which includes the five FAANG stocks plus five other prominent tech companies. Or you could go broader with a fund like the Invesco QQQ ETF (QQQ), which tracks the Nasdaq-100 index, which consists of the 100 largest non-financial companies listed on the Nasdaq exchange, including the five FAANG companies.
If you want to go even broader and get more diversification outside of tech, you could choose index funds like those that track the S&P 500, which gives you exposure to the five FAANG companies plus hundreds of others across sectors.
Risks of investing in FAANG stocks
While FAANG stocks have been hot over the past several years, there are still plenty of risks to investing in them, such as:
Volatility
Investing in any stock can come with volatility, i.e., price swings up and down, but tech stocks like FAANG companies can potentially be more volatile due to issues like a rapidly changing tech landscape and consumer demand. Other stocks like certain financial companies or those that sell consumer staples might have less upside but more stability.
Regulatory scrutiny
Big tech companies like FAANG ones often come under regulatory scrutiny, such as for data privacy or antitrust issues, both in the U.S. and abroad. So, there's a risk that regulation could limit growth or cut into profit margins.
Valuation
Some analysts consider FAANG stocks to be overvalued given their significant gains in recent years, with some thinking that the pace of growth is unsustainable. Instead, it's possible that other competitors will catch up, meaning FAANG stocks might lose some value or at least grow at a slower pace.
However, these risks are all up for debate. You might see these risks as being less likely, or you might simply find the potential rewards to be well worth the risks. Still, take your time to carefully weigh your options, and consider speaking with a financial advisor for more guidance on if/how FAANG stocks might fit into your portfolio.
FAQs about FAANG stocks
Are FAANG stocks a safe investment?
Overall, FAANG stocks are considered relatively stable, safe investments, but there are risks such as around volatility, regulatory changes. There's also the possibility that they're overvalued due to too much investor hype. Risk is subjective, and you'll have to weigh if FAANG stocks's future outlook seems worth it based on your situation.
Should I invest in all FAANG stocks or just a few?
Whether you invest in all FAANG stocks, a few, or none depends on your investment goals and risk tolerance. In general, though, diversification helps reduce risk and potentially increase returns, so it might be worthwhile to invest across all FAANG stocks, plus many other stocks and assets like bonds.
What are some alternatives to FAANG stocks?
An alternatives to FAANG stocks is the Magnificent 7, a group of tech stocks that includes FAANG stocks except Netflix, while adding Microsoft, Nvidia, and Tesla. Some investors might prefer that grouping, while others might go broader, such as with an ETF that tracks many tech companies in addition to FAANG. Other stocks and funds in different sectors could also be worth considering.
