Look at those chompers…I mean fangs.
While we do not want to make this cat angry and have this cat bite us with those teeth, we are not talking about those kinds of fangs. We are talking about the FANG’s know as Facebook, Amazon, Netflix, and Google.
These are not only the beasts of the technology sector but also the cream of the crop when it comes to growth companies. This is one of the reasons why investors love these stocks and when moms and pops buy every single share they absolutely can.
But what if we didn’t want to go ahead and buy a little bit of each and want a more “diversified” way of getting exposure to these names…is there a FANG ETF that we can own? Let’s check it out.
All four FANG stocks are household names. We see what everyone we ever met is up to on Facebook, we buy everything on Amazon, we watch all of our shows on Netflix, and we search the internet with Google. Besides all four of these companies being integrated with most human being’s lives over the course of an average day, they are very high performing companies.
Not bad at all. Here we can see Facebook (green/red), Amazon (pink), Netflix (blue), and Google (yellow), and their performances over the last three years. Here is how each of them did:
- Facebook: +97.99%
- Amazon: +131.13%
- Netflix: +125.43%
- Google: +43.43%
We would be hard pressed to find stocks that have outperformed these. Hence, people are obsessed with these. Looking back at this chart I wish I bought those four, closed by eyes, and woke up three years later a rich man.
But we come to the old age problem. We are lazy beings and we don’t want to worry about going out there and actually purchasing shares of each of these stocks. I mean, Amazon and Google are over $800 a share…who wants to do that?
Well…let us then go on a journey to see if we can find the right FANG ETF for you, which will give us the proper exposure to those four names.
Who is the FANG ETF?
A simple google search gives us four potential winners for the prize of the true FANG ETF.
- First Trust Dow Jones Internet ($FDN)
- PowerShares NASDAQ Internet ($PNQI)
- PowerShares QQQ ($QQQ)
- First Trust ISE Cloud Computing ($SKYY)
We are going to look for the FANG ETF by looking at the following categories: correlation and liquidity.
We do not care about the asset breakdown of each of these ETF’s. For example, we do not care that $FDN is made up of 9.84% Facebook, 10.04% Amazon, 4.41% Netflix, and 4.86% Google. It does not matter because we can find out if we have strong exposure to these four names or not through their correlations. If we have these four stocks with over a 75 correlation to one of these potential ETF’s then they will be highly correlated and give us the proper exposure we are looking for. A 75 correlation means that price moves together 75% of the time.
$FDN is highly correlated to the FANG stocks.
$PNQI is also highly correlated to the FANG’s.
Again, highly correlated.
All of these four potential winners are highly correlated to the four stocks that make up the FANG’s and all would be perfectly acceptable to give us the exposure we are looking for. Like always, liquidity is the deciding factor as liquidity will give us the most efficient ETF to use.
Liquidity is always the most important metric. If we don’t have liquidity, we immediately walk away. Since the above four ETF’s are all highly correlated, we are going to choose the one with the most liquidity. This would mean tightest bid/ask spreads and largest amount of volume in both the stock and options markets.
|ETF||Stock Bid/Ask Spread||Stock Volume||Stock Notional Value||Options Bid/Ask Spread||Options Volume||Options Notional Value|
This table is self explanatory. $QQQ has the highest markets, the most volume, and the largest notional value by a long shot. This means $QQQ is the most liquid which means $QQQ is the winner!
$QQQ is the FANG ETF
By showing its correlation to the FANG stocks and it’s dominating liquidity, we are able to say that $QQQ is the true FANG ETF.
Again, if you would like exposure to Facebook, Amazon, Netflix, and Google, feel free to trade $QQQ by itself as it gives you an incredibly liquid way to have to have exposure to the price movements of these four great companies.