Blog Posts — October 13, 2020

The US market can thank its FAANGs even more now — just keep an eye on risk

by Diana R. Baechle, PhD

This is an update of our original blog post The US market can thank its FAANGs posted on July 30, 2020.

The US market saw an even stronger concentration in stocks recently, with FAANGs (Facebook, Amazon, Apple, Netflix and Google) accounting for 14% of the weight in the STOXX USA 900 on Oct. 9. Add Microsoft to the mix, and the six stocks made up 20% of the US index. Just since July, the aggregate weight of these six stocks increased by one percent in the US index.

Looked at from the risk perspective, FAANGs accounted for almost 20% of the STOXX USA 900 risk. Add in Microsoft, and the number pops to more than 25% of the benchmark risk.

Source: Qontigo

Though down from the September-peak, FAANGs are still up by nearly 50% this year, and were an important driver of the rebound in the US market. The gap between the STOXX USA 900 cumulative year-to-date return with and without the FAANGs hit 7% in early September (Figure 18), though it shrank to about 5% by Oct. 9. In other words, without the FAANGs, the US market would have done about 5% worse so far this year. And if we were to take out Microsoft’s return contribution, the US index would have been up only about 4.5% year to date (as opposed to 11%).

Source: Qontigo

For much of 2020, the short-horizon risk of the FAANGs was roughly equivalent to that of the market as a whole, as measured by Axioma’s short-horizon fundamental US model. However, the risk gap started to widen in July, and the downturn in FAANGs in September drove their risk up, even as the rest of the market saw a decline. The risk gap climbed to a year-to-date high of 11 percentage points at the end of September, but came down somewhat in recent weeks.

The tracking error between FAANGs and the US market rose steeply since the beginning of the year, more than doubling by July when it reached 24%. However, it retraced some of its steps in the third quarter and dipped to a still substantial 16% in October.

Source: Qontigo

Historically, FAANG’s risk mirrored that of the US market, albeit at a higher level, but as we mentioned above, 2020 has shown different patterns. After being remarkably similar in the second quarter, the risk figures for FAANGs and the US market began to diverge in the third quarter, FAANGs becoming much riskier than the overall market in October. This is more in line with what we would expect from a five-stock portfolio as compared to a 900-stock portfolio.

Source: Qontigo

FAANGs are on track for a stellar annual performance in 2020, as COVID cases have started to rise again and remote-working, -learning, -entertaining and -socializing are relying heavily on these handful of stocks. Still, the upcoming US election will bring more uncertainty to the equity market and particularly to FAANGs, as detailed by Olivier d’Assier in his blog post Presidential Election Stress Test Part II: Biden’s Tax Plan Could Take a Bite Out of the FAANGs—and More, and may be one reason their risk has increased more recently.