By Jeff Weniger, CFA, Asset Allocation Strategist
A half-century ago, when investors fell in love with the "Nifty 50," the darling mega-caps of the era that many advised to buy and hold forever, they at least had the ability to choose from among companies that spanned numerous industries (components such as PepsiCo (NYSE:PEP), Schlumberger (NYSE:SLB), Pfizer (NYSE:PFE)1 and so on were in completely different businesses). Not so with today's "nifty" group, the FAANG stocks: Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Netflix (NASDAQ:NFLX) and Google's parent, Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). And being in or out of them could be critical for U.S. equity success in coming years.
It's been a great run thus far for the five "new economy" dynamos, their performance over the last half-decade nothing short of stellar. We unscientifically compiled a list of non-FAANG industries with the sole purpose of coming up with an off-putting acronym. The "SEPTICS" stocks are the anti-FAANG-companies that have not taken the same road to riches in recent years.
Comprising Specialty Retail, Electric Utilities, Packaged Foods, Tobacco, Insurance, Chemicals and Soft Drinks, this motley crew is the "who's who" of industries that give little ammunition to braggarts. Between them, they encompass a not insignificant 83 of the S&P 500's companies and 11.2% of the Index.2
This basket not only didn't lose money but rallied more than 60% from December 31, 2012 to May 10, 2018. No matter; the FAANG stocks beat it by more than 700 percentage points (figure 1).
Figure 1: Cumulative Return Differential: FAANGs minus SEPTICS
That kind of run is a reason that one out of every eight dollars in the S&P 500 is now in the FAANG five. But the truth is that we could have pulled almost any combination of five or six industries, concocted a funny acronym like "SEPTICS" and the FAANG stocks still probably would have crushed it. It wouldn't have mattered if SEPTICS returned 60% or 160% or 260%. Even the last figure would have handily outpaced the S&P's 91% run-up but would have lagged the FAANG stocks.
FAANGs in WisdomTree
Figure 2 shows the FAANG holdings of WisdomTree's six major U.S. equity ETFs, originally compiled in a prior blog post. Aside from the WisdomTree U.S. Earnings 500 Fund (NYSEARCA:EPS), which is our earnings-weighted 500-stock answer to the S&P, many of our ETFs shun the FAANG stocks entirely or nearly so.
Figure 2: WisdomTree ETFs' FAANG Exposure
This is where WisdomTree's rules-based strategies come into play; if the rules don't identify Amazon, Amazon is out. And if they aren't picking up Facebook either, Facebook gets a "zero." Remember, if it weren't for the 1990s' tech bubble and mass movements before it, there wouldn't even be a WisdomTree and you wouldn't be reading this post. That's because that era's market distortions catalyzed WisdomTree's founders to create ETFs that were weighted by fundamental metrics. So if the WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ:DGRW) is 8 percentage points under-weight the FAANG stocks, we will let time be DGRW's judge. The WisdomTree U.S. Multifactor Fund (BATS:USMF) and the WisdomTree U.S. High Dividend Fund (NYSEARCA:DHS) are even bolder, owning none of them, a 12% under-weighting. Time will judge them too.
In or Out
Maybe the FAANG stocks will keep growing until they take over the universe. But if they don't, there is plenty of precedent for seemingly unstoppable stocks to fall from grace. WisdomTree's U.S. equity ETFs are by and large avoiding the FAANG stocks. FAANG skeptics, seek "SEPTICS."
2Sources: WisdomTree, Bloomberg, as of 5/10/18.
Jeff Weniger, CFA, Asset Allocation Strategist
Jeff Weniger, CFA serves as Asset Allocation Strategist at WisdomTree. Jeff has a background in fundamental, economic and behavioral analysis for strategic and tactical asset allocation. Prior to joining WisdomTree, he was Director, Senior Strategist with BMO from 2006 to 2017, serving on the Asset Allocation Committee and co-managing the firm’s ETF model portfolios. Jeff has a B.S. in Finance from the University of Florida and an MBA from Notre Dame. He is a CFA charter holder and an active member of the CFA Society of Chicago and the CFA Institute since 2006. He has appeared in various financial publications such as Barron’s and the Wall Street Journal and makes regular appearances on Canada’s Business News Network (BNN) and Wharton Business Radio.