Investing in FAANG or MAMAA Stocks

It’s hard to talk about the general stock market without mentioning one or more FAANG stocks. The tech giants make up a sizable portion of the S&P 500 index, which means many investors already have at least some exposure to them. Because of the heavy weighting of FAANG stocks in indexes such as the S&P 500, it’s worthwhile for investors to learn a bit more about them.

What are FAANG stocks?

First coined by Jim Cramer in 2013, FAANG is an acronym used to describe some of the most prominent companies in the tech sector. Originally the acronym was FANG for Facebook, Amazon (AMZN 6.83%), Netflix (NFLX -1.41%), and Google. In 2017, investors started including Apple (AAPL 0.8%) in the group, turning the acronym into FAANG.

Despite some prominent company name changes -- Facebook is now Meta Platforms (META 2.91%), and Google is now Alphabet (GOOGL -0.09%) (GOOG -0.03%) -- the acronym has stuck. But with Netflix falling out of favor with investors and the strength of another tech giant, Microsoft (MSFT 0.59%), some have started talking about a similar group of stocks, sometimes known as MAMAA, meaning Meta, Apple, Microsoft, Amazon, and Alphabet.

Over the past decade, the FAANG stocks and Microsoft shares have grown faster than the overall S&P 500 or the more technology-focused Nasdaq. The original four FANG stocks were all internet-based companies, but the later inclusion of Apple -- primarily a consumer hardware manufacturer -- made FAANG a broader group of technology stocks. The inclusion of Microsoft in MAMAA cements the mega-cap tech focus instead of the internet focus of the original group.

1. Meta Platforms

1. Meta Platforms

Meta owns two of the most engaging and largest social media apps in the world -- Facebook and Instagram -- as well as two of the biggest messaging apps, WhatsApp and Messenger. It makes money by displaying ads to users while they browse through photo and video feeds. Meta is investing heavily in virtual reality technology, led by its Oculus headset.

The shift to VR and the metaverse is reflected in the company's renaming itself as Meta Platforms, although its metaverse-focused business, Reality Labs, is currently losing more than $10 billion annually.

2. Amazon

2. Amazon

Amazon is the largest business-to-consumer e-commerce company in the world. Its Prime membership program has more than 200 million global subscribers who have proven extremely loyal to the company’s online marketplace. Although e-commerce accounts for the bulk of its revenue, Amazon has also found profit engines in cloud computing services and advertising.

In fact, most of its profit now comes from its cloud infrastructure business, Amazon Web Services.

3. Apple

3. Apple

Apple is one of the biggest smartphone manufacturers in the world. Device sales account for most of Apple’s revenue, but in recent years the company has also focused on higher-margin subscription services, including streaming music and video, gaming, news, and cloud storage.

Its recent launch of its new spatial computing headset, Vision Pro, could set off the transition to the next major computing platform.

4. Netflix

4. Netflix

Netflix is one of the first internet-born media companies. In 2007, it started to shift from a DVD-by-mail service to on-demand streaming, and it started investing in its own original content for the streaming service in 2012. Today, Netflix is one of the biggest buyers of film and television productions in the world, serving more than 200 million global subscribers.

While legacy media companies have launched their own streaming platforms, Netflix remains the clear leader in the world.

5. Alphabet

5. Alphabet

Alphabet is a tech conglomerate primarily split between Google and its “other bets” segment. Although Google started as an internet search company, it’s continued to acquire and develop consumer-facing products, nine of which boast more than 1 billion users each. Google also encompasses a growing cloud computing business and a relatively small hardware business. The “other bets” segment includes Alphabet’s moonshots, such as automated-vehicle business Waymo and health researcher Verily.

Since the launch of OpenAI's ChatGPT, Alphabet has touted its own AI capabilities and introduced its own chatbot interface Bard AI, staking its claim as a leader in artificial intelligence (AI).

6. Microsoft

6. Microsoft

Microsoft started out licensing its Windows operating system to PC manufacturers, but it’s a much broader company 40 years later. Windows licensing sales are now dwarfed by its cloud computing operations, Azure, and Office productivity suite. The company also operates a gaming segment led by Xbox and an advertising business across its search engine, web portal, and LinkedIn social network. Additionally, it has a relatively small consumer device segment.

Driven by its relationship with OpenAI, the company sees AI as the next major frontier and has invested significantly in new products like the AI-powered Bing.

Are FAANG companies a good investment?

FAANG stocks have historically outperformed the S&P 500 index. Alphabet has been the worst performer of the bunch since June 2013, but it’s still more than doubled the performance of the S&P 500. The strongest performer in that time has been Apple, up roughly 14-fold.

The five FAANG companies combined account for approximately 20% of the S&P 500 and close to half of the Nasdaq-100 Index. Replacing Netflix with Microsoft bumps those percentages up to about 26% and about 60%, respectively.

As every investor should know, past results don’t guarantee future success. Indeed, the FAANG stocks and Microsoft all underperformed the S&P 500 in 2022 during the bear market. That said, FAANG companies exhibit several competitive advantages that make them appealing long-term investments. Most of the companies benefit from network effects.

• Meta’s products are valuable to new users because of its billions of other active users.
• Google products, including YouTube and Search, benefit from their billion-plus users.
• Amazon’s Prime service brings tens of millions of shoppers to its marketplace every day, which makes its seller services more attractive to third-party merchants.
• Netflix’s tens of millions of viewers share feedback about the content the company should invest in and provide the revenue to support its massive budget.
• The lock-in effect of the Apple ecosystem creates significant switching costs for iOS users. That advantage is getting stronger as Apple develops more services, such as Apple Music and Apple Arcade.
• The popularity of Microsoft’s Windows supports the development of applications for Windows, which locks customers into the operating system. Its move to cloud computing and software-as-a-service has enabled it to maintain its position in an increasingly platform-agnostic market.

All five FAANG companies and Microsoft have intangible assets that should make them more profitable than their rivals. Facebook, Amazon, and Google have troves of user data they can tap into to target advertisements. Netflix’s move to original content and exclusive licenses makes its content library irreplaceable. Apple is one of the few companies that makes both the hardware and the software for its devices -- and it is certainly the only one at its scale. It’s hard to find an enterprise operation that doesn’t use Microsoft’s Office suite. Switching costs are too high for a manager to risk his job by selecting another suite of services and retraining everyone on how to use it.

These competitive advantages can make the FAANG (or MAMAA) stocks great potential investments. Still, investors should examine each stock’s valuation relative to its own historical value and that of comparable competitors before buying.

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Can I invest in a FAANG stocks index ETF?

No fund or exchange-traded fund (ETF) contains FAANG or MAMAA stocks exclusively. However, the NYSE FANG+ index tracks the five FAANG stocks and five other tech and tech-enabled leaders, including Microsoft.

In November 2019, BMO Financial Group issued an exchange-traded note that tracks the FANG+ index. It trades on the NYSE Arca exchange under the ticker FNGS (NYSEARCA:FNGS). Owning it is the simplest way for investors to gain added exposure to the returns of FAANG stocks. The ETN has an expense ratio of 0.58%.

With such a small index, investors may be better off building their own portfolio of FAANG or MAMAA stocks and avoiding the ETN expenses -- especially now that most discount brokers charge no commissions and allow fractional share purchases. Building your own portfolio also allows you to optimize stock purchases and sales for your own unique capital gains tax situation.

Considering they’re a major component of the S&P 500, FAANG or MAMAA stocks probably already play at least a small role in your portfolio. But if you want additional exposure to these excellent companies, you can buy the FANG+ ETN or simply dedicate a portion of your portfolio to the stocks themselves.

FAQs about FAANG and MAMAA stocks