{"id":1673,"date":"2024-04-10T07:47:49","date_gmt":"2024-04-10T07:47:49","guid":{"rendered":"https:\/\/www.innov8fs.co.za\/blog\/?p=1673"},"modified":"2026-03-18T11:46:07","modified_gmt":"2026-03-18T11:46:07","slug":"the-faang-fallacy-a-closer-look-at-the-risks-of-acronym-investments","status":"publish","type":"post","link":"https:\/\/www.innov8fs.co.za\/blog\/2024\/04\/10\/the-faang-fallacy-a-closer-look-at-the-risks-of-acronym-investments\/","title":{"rendered":"The FAANG fallacy: A closer look at the risks of acronym investments"},"content":{"rendered":"
\"\"
In recent years, the financial world has been swept up in an acronym frenzy.<\/figcaption><\/figure>\n

From the latest \u2018Magnificent 7\u2019, comprising powerhouses including Microsoft, Apple, Alphabet, Meta, Tesla, Amazon, and Nvidia, to variations like FAANG (the \u2018N\u2019 represents Netflix), MAGMA, and MAMAA, these acronyms represent market darlings in moments of time.<\/p>\n

Even in Australia, we\u2019ve had our own version with the \u2018WAAAX\u2019 \u2013 WiseTech, Altium, Afterpay, Appen, and Xero.<\/p>\n

But the media\u2019s love affair with their meteoric rise can mask a hidden risk: what goes up, doesn\u2019t always stay up. Even within these seemingly invincible acronyms, companies can falter or simply fall out of favour due to factors such as disruption, mismanagement, or poor execution.<\/p>\n

In this blog, we explore how today\u2019s most buzzworthy investment choice can become tomorrow\u2019s cautionary tale, and share some ETF ideas that can help investors navigate market shifts without getting burned by a single stock\u2019s stumble or an entire acronym\u2019s downfall.<\/p>\n

The trend trap<\/h2>\n

During a rising market, when everything seems to be trending up and certain companies are taking off due to a novel idea or theme, it\u2019s tempting to believe that this time is different.<\/p>\n

But it\u2019s precisely during times of exuberance that the allure of quick gains can overshadow prudent investing.<\/p>\n

Lessons from the past: GE, Appen, BRIC<\/h3>\n

History is littered with the wreckage of once-unstoppable companies that were idolised by many investors at the time.<\/p>\n

Consider General Electric, which fell victim to its own poorly timed acquisitions and unsustainable debt, forcing it to split. Its fall from grace as once the world\u2019s largest conglomerate was marked by its expulsion in 2018 from the Dow Jones Industrial Average of America\u2019s 30 most significant businesses1<\/a><\/sup>.<\/p>\n

Closer to home, Appen has lost nearly 99% of its value as its over-reliance on a few large clients led to its fall from grace2<\/a><\/sup>. The company was removed from the S&P\/ASX 200 in 20223<\/a><\/sup>.<\/p>\n

\"\"<\/p>\n

It\u2019s not just individual companies that can fall victim to overhyped trends. Remember the BRICs (Brazil, Russia, India, China)? This catchy acronym once represented the hottest emerging markets, dazzling investors with their brief, initial outperformance (see chart below).<\/p>\n

However, the allure of the story overshadowed key risks like political instability and challenging economic fundamentals in developing nations.<\/p>\n

China\u2019s slowdown, Brazil\u2019s political turmoil, and the mass exodus from Russian assets due to Russia\u2019s illegal war in Ukraine exposed the dangers of overexposure to specific emerging economies. The once-mighty BRICs have now become the \u201cBICs,\u201d delivering subpar returns compared to the broader global and emerging markets.<\/p>\n

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Source: Bloomberg, Betashares. As at 28 March 2024. Indexed to 100 as at 31 March 2009. Index performance measured in US Dollars. Past performance is not indicative of future performance. You cannot invest directly in an index.<\/figcaption><\/figure>\n

Today\u2019s trending acronyms: Magnificent 7, FAANG, MAGMA, MAMAA<\/h3>\n

Facebook, Alphabet, Meta, Amazon, Microsoft, Nvidia, Netflix and Tesla have contributed to a significant portion of the growth in the Nasdaq 100 and S&P 500 indices over the last decade.<\/p>\n

Bundling them together into a memorable acronym and focusing on past performance makes them seem like a sound investment thesis, but going all-in on the tech behemoths can expose investors to undue risk and volatility.<\/p>\n

Just as BRIC obscured the differences in the economies in the constituent countries, FAANG and its variants can mask significant differences in the performance of individual stocks, as shown in the chart below.<\/p>\n

\"\"
Source: Bloomberg, Betashares. Performance timeframe: 1 April 2023 to 28 March 2024. Indexed to 100 as at 1 April 2023. Past performance is not indicative of future performance.<\/figcaption><\/figure>\n

Although focusing on a short period of time, the performance of the FAANG companies for the last 12 months illustrates significant divergence between them, with Apple gaining just 3.2%, while Meta soared over 120%. Netflix, bumped out of the FAANG club in favour of Microsoft to form MAGMA or MAMAA, is experiencing a resurgence and outperforming Microsoft, Amazon, and Alphabet.<\/p>\n

These unexpected outcomes illustrate that investing in one or a few of these equities exposes investors to volatility, unpredictability, and the potential to wipe out gains in dramatic twists and turns.<\/p>\n

What can we learn?<\/h2>\n

While it\u2019s true that historically, these companies have made substantial contributions to index returns, it\u2019s equally undeniable that it\u2019s impossible to predict when companies are past their prime.<\/p>\n

The data speaks volumes. Since 2015, nearly a third (around 180 companies) of the S&P 500 constituents have been replaced4<\/a><\/sup>, often due to economic shifts, disruption, poor management, or acquisitions by larger rivals.<\/p>\n

Furthermore, the tables below show how radically different the list of the world\u2019s largest companies has become since 2000, compared to recent history.<\/p>\n

Largest companies by market capitalisation (1 January 2000)<\/strong><\/p>\n

\n
\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Rank<\/td>\nCompany<\/td>\nMarket cap (1 January 2000)<\/td>\n<\/tr>\n
1<\/td>\nMicrosoft<\/td>\nUS$606 billion<\/td>\n<\/tr>\n
2<\/td>\nGeneral Electric<\/td>\nUS$508 billion<\/td>\n<\/tr>\n
3<\/td>\nNTT Docomo<\/td>\nUS$365 billion<\/td>\n<\/tr>\n
4<\/td>\nCisco<\/td>\nUS$352 billion<\/td>\n<\/tr>\n
5<\/td>\nWalmart<\/td>\nUS$302 billion<\/td>\n<\/tr>\n
6<\/td>\nIntel<\/td>\nUS$280 billion<\/td>\n<\/tr>\n
7<\/td>\nNippon Telegraph<\/td>\nUS$271 billion<\/td>\n<\/tr>\n
8<\/td>\nNokia<\/td>\nUS$219 billion<\/td>\n<\/tr>\n
9<\/td>\nPfizer<\/td>\nUS$206 billion<\/td>\n<\/tr>\n
10<\/td>\nDeutsche Telekom<\/td>\nUS$197 billion<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n

Largest companies by market capitalisation (1 July 2022)<\/strong><\/p>\n

\n
\n\n\n\n\n\n\n\n\n\n\n\n\n\n
Rank<\/td>\nCompany<\/td>\nMarket cap (1 July 2022)<\/td>\n<\/tr>\n
1<\/td>\nSaudi Aramco<\/td>\nUS$2.27 trillion<\/td>\n<\/tr>\n
2<\/td>\nApple<\/td>\nUS$2.25 trillion<\/td>\n<\/tr>\n
3<\/td>\nMicrosoft<\/td>\nUS$1.94 trillion<\/td>\n<\/tr>\n
4<\/td>\nAlphabet<\/td>\nUS$1.43 trillion<\/td>\n<\/tr>\n
5<\/td>\nAmazon<\/td>\nUS$1.11 trillion<\/td>\n<\/tr>\n
6<\/td>\nTesla<\/td>\nUS$707 billion<\/td>\n<\/tr>\n
7<\/td>\nBerkshire Hathaway<\/td>\nUS$612 billion<\/td>\n<\/tr>\n
8<\/td>\nUnited Health Group<\/td>\nUS$485 billion<\/td>\n<\/tr>\n
9<\/td>\nJohnson & Johnson<\/td>\nUS$472 billion<\/td>\n<\/tr>\n
10<\/td>\nTencent<\/td>\nUS$435 billion<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n<\/div>\n

This is where considering ETFs that track entire markets and sectors, or invest in securities with defined criteria, makes sense:<\/p>\n

    \n
  • Built-in diversification:\u00a0<\/strong>No need to stress over choosing individual winners. Index-tracking ETFs spread your investment across a range of companies, making diversification easier and reducing your exposure to any single company\u2019s setbacks.<\/li>\n
  • Automatic rebalancing:\u00a0<\/strong>Indexes aren\u2019t static. As companies fluctuate within the index, underperformers are regularly swapped out for stronger contenders. This ensures your portfolio remains aligned with the economy\u2019s evolution.<\/li>\n
  • Long-term focus:\u00a0<\/strong>Index funds aren\u2019t swayed by short-lived trends. They aim to track the overall market or companies (before fees and expenses) that meet defined criteria, capturing growth across various industries and sectors. This approach helps you weather the inevitable ups and downs of the market.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"

    From the latest \u2018Magnificent 7\u2019, comprising powerhouses including Microsoft, Apple, Alphabet, Meta, Tesla, Amazon, and Nvidia, to variations like FAANG (the \u2018N\u2019 represents Netflix), MAGMA,…<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4],"tags":[],"class_list":["post-1673","post","type-post","status-publish","format-standard","hentry","category-innov8ions"],"_links":{"self":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1673","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/comments?post=1673"}],"version-history":[{"count":1,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1673\/revisions"}],"predecessor-version":[{"id":1678,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/posts\/1673\/revisions\/1678"}],"wp:attachment":[{"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/media?parent=1673"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/categories?post=1673"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.innov8fs.co.za\/blog\/wp-json\/wp\/v2\/tags?post=1673"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}