The so-called FANG stocks – Facebook (NasdaqGS: FB), Amazon (NasdaqGS: AMZN), Netflix (NasdaqGS: NFLX) and Google or Alphabet (NasdaqGS: GOOG) – have been among the best performers this year. However, the outperformance may not last, and investors may turn to more equally weighted exchange traded funds to give the smaller guys a chance.
In 2015, FANG stocks are collectively up 86%, and the top ten companies, which include FANG, have added 74 points or 3.6 percentage points of S&P 500 returns, writes Thomas Lee of Fundstrats for Barron’s. [ETF Trends on Fox Business]
However, Lee pointed out that top performers rarely show a repeat performance the following year. Since 2005, the top 10 stocks underperformed the following year by an average 290 basis points. Of the 2014 top performers, Union Pacific (NYSE: UNP) and Berkshire Hathaway (NYSE: BRK.B) turned into the worst performers of 2015.
“In other words, what was the top performer in 2015 is unlikely to see follow through,” Lee said.
Consequently, Lee argues that investors should be looking at the worst stocks as possible outperformers next year.
ETF investors could also begin to shift away from top heavy, market capitalization-weighted index funds like he PowerShares QQQ (NasdaqGM: QQQ), which tracks the Nasdaq-100, for ETF options that equally weight components, like the Direxion NASDAQ-100 Equal Weighted Index Shares (NYSEArca: QQQE) and the First Trust NASDAQ-100 Equal Weighted Index Fund (NasdaqGS: QQEW).
QQQ includes a 26.0% tilt toward FANG components. On the other hand, QQQE’s largest component holding is Baidu (NasdaqGS: BIDU) at 1.5%. QQEW only includes a 4% weight toward FANG stocks.
Due to their equal-weight indexing methodology, QQQE and QQEW include a larger position in mid-cap companies and smaller tilt toward technology names.
Specifically, QQQE market-cap weights include 19.5% mega-caps, 45.3% large-caps and 35.3% mid-caps. QQEW holds 20.1% mega-caps, 46.2% large-caps and 33.7% mid-caps. Meanwhile, QQQ has 60.8% mega-caps, 30.8% large-caps and 8.4% mid-caps.
Additionally, QQQ includes a hefty 55.5% allocation toward the technology sector, followed by 20.6% consumer discretionary and 14.6% health care. In contrast, QQQE has 43.3% tech, 26.5% consumer discretionary and 13.1% health care. QQEW holds 36.% tech, 30.4% consumer services and 14.9% health care.
For more information on the tech space, visit our technology category.
Max Chen contributed to this article.