FAANGs’ market performance is driving force behind US market achieving positive returns, according to Qontigo

The US equity market is reporting positive returns, but new data from Qontigo shows that this was largely driven by the stellar performances of FAANGs (Facebook, Amazon, Apple, Netflix and Google.

The FAANGs tech giants contributed 3.75 per cent to the benchmark, which, without them would have delivered cumulative year-to-date returns of -2.17 per cent.

Qontigo’s data shows that as FAANG stocks have soared, their weight in the STOXX USA 900 benchmark has also increased, with the five stocks now making up close to 14 per cent of the US benchmark - up from 11 per cent at the end of 2019. Apple, Amazon, Facebook and Google currently have the second, third, fourth and fifth largest weights in  the US index, respectively, after Microsoft. 

Among the five tech giants, Amazon was the best performer, posting a total return of 63 per cent in 2020. Because of its high level of gains, Amazon also contributed more than Microsoft to the positive return of the US index. Netflix was the second-best among the FAANGs, with a total return of 48.5 per cent over the same period. Facebook posted the smallest return at 12 per cent, but still substantially outperformed the US market as a whole this year.

Diana Baechle, director, Applied Research at Qontigo, says: “While the FAANGs have long basked in the investment spotlight, the digital transformation accelerated by the coronavirus crisis has dramatically amplified the market influence of these tech giants in the US. In fact, the phenomenal run of the FAANGs has pushed the US market into the black year to date,  and the gap in the volatility of the two has also narrowed. The new wave of coronavirus cases, especially if it is followed by renewed lockdowns, will most probably continue to benefit the tech sectors.”

At the same time as posting positive returns to propel the broader US market, the FAANGs have become relatively less risky than the rest of the US stock market, Qontigo’s risk models have shown. High-flying names like the FAANGs are typically thought of as being riskier than the overall market, as shown by the FAANG portfolio seeing substantially higher risk for most of the past eight years.  While the risk for both FAANGs and the US market spiked in February, Qontigo’s data shows that US Market risk then suddenly approached that of the five-stock portfolio. 

Baechle adds: “Between April and June of 2020, the risk figures for FAANGs and the US market as a whole were remarkably similar. In other words, the set of stocks that was twice as volatile as the overall market before the Covid-19 crisis, actually became less risky in the aftermath of the pandemic! However, the scrutiny over the oligopoly achieved by some of these companies could be a deterrent factor for the future, resulting in the requirement of a larger ‘regulatory’ risk-premium for investors choosing to hold them.”