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Are FAANGs losing their bite? Rethink your equities allocation

Are government regulators about to take a bite out of the popular FAANG* stocks? Multiple reports surfaced earlier this week of regulators looking to expand their oversight and antitrust probes of several tech giants, which drove large one-day losses in the FAANG stocks. Specifically, the Department of Justice will focus on Google and Apple, and the Federal Trade Commission will examine how Facebook and Amazon’s business practices could be negatively impacting competition.

The news on June 3, 2019, rattled the FAANG stocks, as Facebook fell by 7.51%, Google declined 6.12%, Amazon was down 4.64% and Apple’s loss was more muted at “just” 1.01%.

At first blush, this might seem to be a trivial one-day affair. But upon closer scrutiny, this is meaningful for almost all investors, especially those who continue to put their faith in market-capitalization indexed products for their core equities allocations. We have been cautioning investors that the performance of the S&P 500® Index has been concentrated in its top 10 stocks, as illustrated in the chart below.

Concentration chart


We continue shouting that the day may soon come when market cap-weighting** will no longer seem like such a great idea. The FAANG selloff on June 3, 2019, may have provided a glimpse into that future. And with the upcoming election, consider how many more times we will hear the drumbeat for heightened regulation or even the potential break-up of the largest tech stocks over the next 18 months. As a result, cap-weighted indexes (like the S&P 500® Index) that are heavily influenced by their largest constituents may be setting up for a period of underperformance.

We believe investors should consider more diversified approaches for their core equities allocation, including volatility weighting, whereby each constituent carries an equal risk contribution to the overall portfolio. Such strategies may offer better diversification and avoid the concentration hazards inherent to market cap-weighting.

 

* Facebook, Apple, Amazon, Netflix and Alphabet's Google

** Cap weighting is the index methodology that the S&P 500 uses, which weights stocks according to size.

Diversification and volatility weighting do not assure a profit or eliminate the risk of loss.  

This material should not be construed as a recommendation or advice for any security.

An index is unmanaged and not available for direct investment; therefore its performance does not reflect the expenses associated with the active management of an actual portfolio. The views are as of the date published and are subject to change. This material is provided for informational purposes only and may not be used or construed as investment advice or a recommendation to take any particular investment action. There is no guarantee that the information supplied is accurate, complete, or timely. ©2019 Victory Capital Management Inc.
Consider the investment objectives, risks, charges and expenses of the funds carefully before investing. Download a prospectus or summary prospectus, if available, containing this and other important information for USAA Mutual Funds from www.usaa.com/prospectus, for Victory mutual funds from www.victoryfunds.com, or for VictoryShares and VictoryShares USAA ETFs from www.victorysharesliterature.com. Read it carefully before investing.

Investments involve risk including possible loss of principal. The value of the equity securities in which the fund invest may decline in response to developments affecting individual companies and/or general economic conditions. Dividends are never guaranteed. International investing involves special risks, which include changes in currency rates, foreign taxation and differences in auditing standards and securities regulations, political uncertainty, and greater volatility. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. You may lose money by investing. There are no guarantees the funds will achieve their investment objectives and strategies may be unsuccessful.

Investments in bank loans may at times become difficult to value and highly illiquid; they are subject to credit risk such as nonpayment of principal or interest, and risks of bankruptcy and insolvency. Fixed income securities are subject to interest rate, inflation, credit and default risk. The bond market is volatile. As interest rates rise, bond prices usually fall, and vice versa. The return of principal is not guaranteed, and prices may decline if an issuer fails to make timely payments or its credit strength weakens.

ETFs have the same risks as the underlying securities traded on the exchange throughout the day. Redemptions are limited and often commissions are charged on each trade, and ETFs may trade at a premium or discount to their net asset value. There can be no assurance that an active trading market for shares of an ETFs will develop or be maintained. The ETFs are not actively managed and may be affected by a general decline in market segments related to the Indexes. The ETFs invest in securities included in, the Index, regardless of their investment merits. The performance of the ETFs may diverge from that of the Indexes. 

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Judgments about a particular security, markets or investment strategy may prove to be incorrect and may cause an actively managed ETF to incur losses.


Victory Capital does not endorse and is not responsible for any ads, content, products, advice, opinions, recommendations or other material of third party sites that may be promoted via advertising within social media properties.

Content on Xchange, the Victory Capital Blog, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date posted and may change as subsequent conditions vary. The information and opinions contained in each post are derived from proprietary and non-proprietary sources deemed by Victory Capital to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

This material does not constitute a distribution, offer, invitation, recommendation, or solicitation to sell or buy any securities; it does not constitute investment advice and should not be relied upon as such.  Investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Victory Capital means Victory Capital Management Inc., the investment adviser of the Victory Capital mutual funds, USAA Mutual Funds, VictoryShares ETFs, and VictoryShares USAA ETFs. Victory Capital mutual funds and USAA Mutual Funds are distributed by Victory Capital Services, Inc. (VCS). VictoryShares ETFs and VictoryShares USAA ETFs are distributed by Foreside Fund Services, LLC (Foreside). VCS and Foreside are members of FINRA. VCS and Victory Capital are not affiliated with Foreside. USAA is not affiliated with Foreside, Victory Capital, or VCS. USAA and the USAA logos are registered trademarks and the USAA Mutual Funds and USAA Investments logos are trademarks of United Services Automobile Association and are being used by Victory Capital and its affiliates under license.

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