1100 13th Street, NW, Suite 750Washington, DC 20005202.887.6400Customer Service: 800.544.0155
All Contents © 2019The Kiplinger Washington Editors
By Michael Foster, Contributing Writer
| January 30, 2018
Does “FOMO” – fear of missing out – have you down? If you’re in the stock market but too scared of tech stocks, you might be feeling a twinge of regret right now.
The famous FAANG stocks – Facebook (FB), Amazon.com (AMZN), Apple (AAPL), Netflix (NFLX) and Google parent Alphabet (GOOGL) – returned 49% on average in 2017. These companies simply crushed the Standard & Poor’s 500-stock index, which gained a bit more than 19% last year.
If you’re worried that these gains are divorced from fundamentals, you’re barking up the wrong tree. All of these companies are growing revenues year-over-year, and all but Amazon are on pace for year-over-year profit gains (Amazon has been open about its reason for earnings declines: heavy investment into Amazon Prime content, warehouses and other improvements).
What’s more, the price investors are paying for that growth is conservative relative to the broader market. James Wang, internet analyst at ARK Investment Management, sees many valuations for tech stocks being lower than the broader market. “For example, Facebook is growing revenue at 47% but trades at P/E of 33. It’s much cheaper than the S&P 500 average of 4% growth and 26 P/E,” he says, noting that investors can buy FAANGs’ growth for cheaper than the broader market’s growth.
You can access these stocks individually, but funds are an attractive alternative. Buying funds that are heavily invested in FAANG stocks allows you to ride them higher while also benefiting from other technological trends. Here are 10 funds that offer the best of several worlds.
Data is as of Jan. 29, 2018. Yields represent the trailing 12-month yield, which is a standard measure for equity funds. Funds listed in reverse order of FAANG exposure. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $619.8 million
52-week return: 26.4%
Distribution rate: 6.8%*
FAANG Weight: 7.9%
The list’s first entry is an odd duckling, in that the AllianzGI Equity & Convertible Income Fund (NIE, $22.37) is one of the few funds discussed today that aren’t technology-specific. Instead, the NIE is a broad-equity, multi-asset fund.
Nonetheless, its top six holdings include four FAANG stocks – Facebook, Apple, Amazon and Alphabet – which makes it a good stand-in for investors who want to benefit from these stocks specifically without heavily overweighting tech.
Yes, NIE is most heavily exposed to the tech sector (34.9%), but it also has significant holdings in consumer discretionary (17.6%), health care (15.6%) and industrials (15.6%). Moreover, this diverse fund not only includes equity, but convertible bonds. Thus, it’s less exposed to a big downturn in the stock market. Whenever that may be. Lastly, the fund can sell covered calls – a popular trading strategy used to generate income.
That explains a generous distribution rate of 7.2%, which recently was increased and is currently more than covered by its capital gains and investment income from those bond holdings. The fund offers this generous yield without using leverage – an oft-used tool of CEFs; combined with its covered-call strategy, that makes NIE a safer pick than similarly constructed funds during down markets.
*Distribution rate – which can be a combination of dividends, interest income, realized capital gains and return of capital – is an annualized reflection of the most recent payout. Distribution rate is a standard measure for CEFs.
Market value: $548.9 million
52-week return: 93.4%
Dividend yield: 0.1%
FAANG Weight: 9.7%
The ARK Innovation ETF (ARKK, $42.33) is a tech-focused fund, investing in companies that are involved with budding technologies across three main cornerstones – the “Genomic Revolution,” “Web x.0” and “Industrial Innovation” – for three ARK exchange-traded funds.
In other words, this is a blended “best of the best” ETF that doesn’t target one particular theme, but instead broader technological innovation. Thus, the cloud, robotics, electric vehicles and several other trends are represented in the ARKK.
While the FAANGs play a small part in this fund’s performance, the company also is heavily invested in companies such as EV maker Tesla (TSLA), 3D printing company Stratasys (SSYS) and genome editing therapy developer Intellia Therapeutics (NTLA).
ARKK also offers a bit of geographic diversification, with some of its portfolio dedicated to Chinese tech giants Baidu (BIDU) and JD.com (JD), as well as companies from Japan and other nations. Lastly, it’s worth pointing out that the fund has a small (1% presently) holding in the Bitcoin Investment Trust (GBTC) – an over-the-counter fund that attempts to track the price of the cryptocurrency Bitcoin.
Market value: $667.6 million
52-week return: $64.2%
Distribution rate: 5.2%
FAANG Weight: 19.3%
Like the NIE, the BlackRock Science and Technology Trust (BST, $29.84) sticks out in large part because of its sizable dividend. At 5.2%, the BST yields far more than just about every tech ETF on the market.
That’s in part because BST, like NIE, is a closed-end fund, which offers a few advantages on the yield front. For instance, CEFs’ market yield can sometimes be higher than the actual yield on the fund’s portfolio, as it’s possible for closed-end funds to trade at a discount to their net asset values. BlackRock’s fund currently trades at a slight 1% discount to NAV, slightly helping to prop up the yield.
But the high yield largely is attributable to BST’s ability to sell covered calls against its portfolio – just like NIE.
Past those attributes, BlackRock Science and Technology Trust’s portfolio looks like your garden-variety global technology fund. About 64% of BST’s 89 holdings are in U.S. tech stocks including FAANG members Apple, Alphabet, Amazon and Facebook, while the rest is an international smattering including China (14.6%), Japan (3.7%) and the Netherlands (3.2%).
A good strategy for many CEFs is to try to buy in when the fund’s discount widens. BST, for instance, has traded at a whopping 11% discount to NAV within the past 52 weeks.
Market value: $111.5 million
52-week return: 24.7%
Dividend yield: N/A
FAANG Weight: 19.5%
Warren Buffett lovers may take a liking to the Davis Select U.S. Equity ETF (DUSA, $25.13) – a broad equity fund that seeks out “high-conviction, best-of-breed businesses.” That’s because DUSA not only has more than 10% of its assets invested in the Oracle of Omaha’s Berkshire Hathaway (BRK.A, BRK.B), but it also holds Berkshire picks such as American Express (AXP) and Wells Fargo (WFC).
The best-in-breed focus by managers Danton Goei and Christopher Davis has resulted in numerous bets on tech, including FAANG stocks Amazon and Alphabet as well as companies such as China e-commerce platform JD.com.
This is hardly a large fund, at just $111 million in assets under management, making it microscopic in the multi-trillion-dollar ETF universe. However, it’s attracting net assets fast – DUSA boasted just $27 million in AUM midway through 2017.
Market value: $341.8 million
52-week return: 88.2%
Dividend yield: 0.8%
FAANG Weight: 19.9%
The ARK Web x.0 ETF (ARKW, $51.11) homes in on various companies “expected to benefit from shifting the bases of technology infrastructure to the cloud,” covering a wide swath of industries including cloud computing, e-commerce, digital media and even blockchain.
Its fairly aggressive approach to technology makes its five FAANG holdings look conservative by comparison. For instance, the fund invests in Tesla – still a relative upstart in the automaking industry – Latin American e-commerce platform Mercadolibre (MELI) and even Bitcoin via GBTC.
Concerning the risks in this ultra-tech portfolio, ARK analyst James Wang told me that his company takes a multi-pronged approach to managing the risks of a major downturn in the fund. “We control risk through diversification across industry and geography as well as by employing a longer investment time horizon,” he said.
Indeed, roughly 20% of the portfolio is invested outside of North America – one of several factors that has led the ARKW to a three-year return of nearly 150%, which is more than double the U.S.-focused Technology Select Sector SPDR Fund (XLK).
Market value: $1.6 billion
52-week return: 43.4%
Dividend yield: 0.9%
FAANG Weight: 26.3%
The iShares Global Tech ETF (IXN, $165.50) is a so-called “global” fund, which means that it invests both domestically and abroad – typically with a heavy bent toward the U.S. (For truly ex-U.S. exposure, you want to look for “international” funds.)
To wit, the IXN is almost three-quarters exposed to American stocks, while Japan and China are its largest international areas of investment at just 5.3% and 4.3%, respectively. There’s also a distinct lack of European focus, with Germany and the Netherlands the largest representatives at a respective 2.2% and 1.2%.
What’s also important to note is that the IXN’s definition of “tech” is one that views companies such as Amazon and China’s Alibaba (BABA) as consumer discretionary (essentially, retailers) instead of technology. Thus, while this ETF is very much a who’s who of global large-cap tech, it’s missing a few familiar names that many people often associate with tech.
Still, the FAANGs are well-represented with large holdings in Apple, Facebook and Alphabet. International mega-caps include the likes of Tencent and South Korea’s Samsung (SSNLF).
Market value: $19.0 billion
52-week return: 40.3%
Dividend yield: 1.0%
FAANG Weight: 30.7%
The Vanguard Information Technology ETF (VGT, $177.71) is the tech entry from the king of inexpensive passive investing, costing a mere $10 annually on every $10,000 invested.
As far as sector funds go, there are few cheaper options.
Basic passive index funds do have their problems, among them that you often get plenty of losers alongside the winners. While the VGT is chock full of FAANGs, its market capitalization-weighting methodology also means that laggard International Business Machines (IBM) recently was a top-10 holding. This is a company that, up until recently, strung together a 22-quarter streak of declining year-over-year revenues.
Still, a heavy allocation to the FAANGs – Apple (13.9%) and Alphabet (10.2%) are both double-digit weightings – and a broader tech focus have served the VGT well. The fund has delivered a total return of 165% over the past five years, clobbering the S&P 500’s 107% total return in the same time period.
Market value: $21.4 billion
52-week return: 37.2%
Dividend yield: 1.4%
FAANG Weight: 31.9%
The Technology Select Sector SPDR Fund (XLK, $68.56) is the largest technology ETF on the market, at $21.4 billion in assets under management. That’s thanks in part to simply being around for so long (its inception was in December 1998), and in part because of its low expense ratio.
Like the VGT, the XLK is market cap-weighted, which means $860 billion Apple is its largest holding at 13.6% of the portfolio, while Alphabet and Microsoft (MSFT) make up another 11%-plus apiece. Facebook rounds out the FAANG exposure for this ETF, which doesn’t hold Amazon nor Netflix.
One nice thing about the XLK is that its focus on large-cap tech has resulted in a focus on dividend growth. Yes, the fund only yields a measly 1.4% at current prices, but the nominal payout has grown from 21 cents per share in 2018 to 87.61 cents last year – meaning earlier investors have seen their dividends and yield on cost quadruple in that time.
These distributions should continue growing as an ever-larger number of tech companies are paying out dividends as they mature. For instance, Apple delivered absolutely no income as recently as 2012, but has grown its dividend by roughly 66% since it resumed a regular payout six years ago.
Market value: $549.9 million
52-week return: 44.4%
FAANG Weight: 36%
If you’re optimistic about the growth of online commerce, you can express that confidence via the PowerShares Nasdaq Internet Portfolio (PNQI, $131.04).
The PNQI invests in stocks tethered to internet-related businesses, covering e-commerce, social media, video content delivery and more. That means there are FAANGs aplenty – only Apple is excluded from the bunch – as well as online travel site Priceline.com (PCLN), online auction site eBay (EBAY) and Chinese gaming giant NetEase (NTES).
While the fund’s moniker might lead you to believe that it only holds Nasdaq-listed stocks, that’s not the case – it simply invests in companies tracked by a Nasdaq-created index, which includes stocks listed on the New York Stock Exchange and other exchanges. Also, a modified market-cap weighting methodology means that larger companies generally contribute more to performance, but it’s not based entirely on size. For instance, $123 billion Netflix (10.6%) is a significantly larger holding than $540 billion Facebook (7.3%).
Investors also should note that consumer discretionary stocks such as Netflix and Amazon make up almost 40% of the fund, which means PNQI really should benefit from the continued trend of people shopping and otherwise spending money online.
Market value: $64.5 billion
52-week return: 36.5%
FAANG Weight: 36.1%
The PowerShares QQQ Trust (QQQ, $170.09) is the most FAANG-happy fund out there despite the fact that it’s technically not a tech fund.
Yes, the QQQ is indeed a tech-heavy portfolio, with the sector claiming just more than 60% of the fund’s assets. But that’s a result of what the ETF does – not necessarily its intent. See, the PowerShares QQQ Trust tracks the Nasdaq-100, which is an index composed of the 100 largest non-financial companies on the Nasdaq stock market. It just so happens that many of those companies are in the tech space.
Other sectors are represented, too, including consumer discretionary and healthcare. So in addition to large holdings in the FAANGs, there are companies such as Starbucks (SBUX), Marriot International (MAR) and Amgen (AMGN).
There’s a worry that some FAANGs’ price-to-earnings ratios have become too inflated thanks to their breakneck runs, putting funds like the QQQ at risk. However, Robert Rostan – founder, CEO and principal at financial education center Training The Street – says many value investors that avoid the FAANGs do so because of a traditional (and possibly outdated) focus on the wrong metrics.
“I think that the FAANG equities are measured more by their growth and potential growth, not current earnings,” Rostan says. That doesn’t mean earnings are irrelevant – but that the traditional accounting rules in GAAP (generally accepted accounting principles) are less relevant for the technology companies of today than they were for the industrial firms of yesteryear. “The one GAAP measure that captures some growth is revenue, and I do think that revenue multiples are still appropriate for these firms,” he says.