FMD Capital Management

FANG ETF Takes Performance Chasing To The Next Level

Written by David Fabian, July 15th, 2017

We’ve finally hit peak “FANG”.  The acronym used to describe a handful of high growth stocks including Facebook, Amazon, Netflix, and Google.  It’s a way for market watchers and CNBC aficionados to easily reference these big winners without overtaxing their jaw muscles.

All four of these household names have gained more than 30% over the last 52-weeks.  Their momentum has become so unstoppable that someone felt it would be a good idea to create an ETF geared specifically towards this theme.

The AdvisorShares New Tech And Media ETF (FNG) recently debuted as an actively managed equity fund designed to tap into the technology space.  This aggressive growth strategy is heavily concentrated in a portfolio of 28 stocks that were selected and weighted by Sabretooth Advisors, LLC.  The original FANG stocks are all represented near the top of the group with several other strong contenders like NIVIDIA and Alibaba rounding out the leaders.

The marketing material surrounding FNG is heavily influenced by words like innovation, leadership, disruption, and flexibility.  All phrases that have likely been used in one form or another to describe the business models of its holdings.  You won’t find any beaten down value plays with 100-year track records in here.

FNG has an instant edge in that its portfolio comes out of the gates with some of the best stocks in the current market.  That may also be its downfall as well.  With no index guidelines or other rules-based criteria, the advisor is simply chasing whatever is hot in the hope that it continues to run indefinitely.

Like any sector or thematic ETF, it will almost certainly experience periods of sharp alpha (outperformance) and other cycles of weak relative returns.  Such is the life of an active stock picker.

At the sector level, FNG will likely be compared to the Technology Select Sector SPDR (XLK).  This ETF represents the large-cap technology segment within the S&P 500 Index.

An even closer peer comparison is likely to be drawn from the First Trust Dow Jones Internet Index Fund (FDN).  This passive index ETF owns stocks that comprise more than 50% of their sales from the internet.  It’s no surprise that Amazon, Facebook, and Google are all found in the top holdings of FDN.  Until recently, it was just about the most FANG-like ETF you could possibly own.  That’s one of the reasons it has $4.6 billion in assets under management and allocates to just 42 stocks.  Performance has been that good.

The two questions potential investors should ask themselves are:

  1. Does the FDN strategy have merit?
  2. Where does it fit within my portfolio?

Based solely on the success of FDN, there is clearly a substantial pool of assets that is committed to chasing these technology powerhouses.  Sector and industry-focused funds are no strangers to the ebb and flow of money that comes with varying market trends.  The hardest part for FNG will be to differentiate itself enough to lure money away from the likes of FDN and other low-cost competitors.  Often, ETF investors just stick with what they already own because of the track record and liquidity of the market share leader.

Costs can play a factor too.  FDN charges an all-in expense ratio of 0.54% annually, versus 0.85% for FNG.  That will be a tough hill to climb.  Nevertheless, performance is the great equalizer when it comes to quibbling over a few basis points in fees.

As for finding a home for FNG in your portfolio, it all comes down to your investment style.  Aggressive all-stock investors who are fans of momentum will feel right at home owning a slice of this in their accounts.  It goes without saying that you can’t be too afraid of volatility if you choose to own this type of position.  It’s probably best used in a moderate support role alongside more diversified, core ETFs with multi-sector exposure.

The active management component in FNG will probably not include any form of conventional risk management.  Rather, the advisor will focus its efforts on security selection, allocation, and rotation to areas that they feel are showing the greatest promise for fast growth.  It sounds a lot easier than it is when you are running real money in real time over unknown obstacles.

The Bottom Line

I’m open minded enough to give this type of ETF a chance to compete against the likes of FDN.  It will take some time before we get a better sense of how the portfolio performs versus its peers and whether its existence marks a turning point for the market in general.  I’ll be keeping an eye on the relative returns and won’t be surprised if FNG starts to cut its fee and get more aggressive if it is able to build a sticky base of investment capital.

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Note: This article originally appeared on Investorplace.com