logo

Hedge against FANG earnings with this ETF strategy

VIDEO3:2103:21
Here's how much FANG really matters to the market ahead of earnings

Is it time to forget FAANG?

It's no secret that Facebook, Amazon, Apple, Netflix and Google parent Alphabet have enormous influence over the stock market's moves. Their collective market cap alone is over $3.4 trillion.

And, as three of the technology giants — Facebook, Amazon and Alphabet — prepare to report earnings this week, investors may be feeling queasy looking at the double-digit year-to-date gains in Facebook and Amazon.

And because these stocks account for huge swaths of the growing exchange-traded fund market, hedging against them is a particularly difficult task for investors.

For example, when Alphabet's Class A and C shares alone account for 23% of the Communication Services Select Sector SPDR Fund, the question for investors becomes how to navigate potential turmoil in the most effective way.

"I think it is reasonable to be concerned when we get to frothy markets and these high concentrations," ETF.com managing director Dave Nadig said Monday on CNBC's "ETF Edge."

Luckily, "there are lots of ways to insulate your portfolio from some of these moves," Nadig said. "You can buy reverse-cap-weighted ETFs, which effectively will underweight things that are over-present in the S&P [500], or you can just go into any number of factor-weighted or equal-weighted [funds]."

With the five FAANG stocks making up one-eighth of the S&P 500, the reverse-cap strategy might just offer the right counterbalance because these stocks wield more power over the major indexes, Nadig said.

"It effectively turns [the investment] into a mid-cap fund," he said. "When we see these big, large-cap momentum names like Google, Amazon, Facebook ... inevitably fall out of bed, the mid-caps tend to be what come up and pick up the slack."

But for some, like Astoria Portfolio Advisors founder and Chief Investment Officer John Davi, these stocks are too cumbersome any way you slice them.

"As you get bigger in size [and] market cap, then you're going to be a bigger driver of these indices," he said in the same "ETF Edge" interview. "My whole premise is to invest away from market cap — to invest in factors [and] quantitatively driven ETFs."

In some ways, FAANG's moment might have already come and gone, Davi said.

"I think you want to shy away from FANG and cyclical and growth stocks," he said. "I think you want to lean more on stocks that have strong earnings, high-quality stocks. That's the premise that we've been riding in our portfolios all year and I think that makes a lot of sense."

Facebook, which reports earnings Wednesday, climbed 2% in Monday's trading session and is up a whopping 54% this year. Amazon and Alphabet, which report Thursday, were up about 1% in Monday trading.

Disclaimer