The DIY FAANG 2.0 Portfolio

October 31, 2022

Look out FAANG, here comes FAANG 2.0, and it has nothing to do with Facebook. 

Strive Asset Management, the “anti-woke” exchange-traded fund issuer, recently filed a prospectus for an ETF that will invest in fuels, aerospace, agriculture, nuclear and gold.  

This is FAANG 2.0, a departure from the original FAANG created by CNBC host Jim Cramer that identified fast-growing internet companies: Facebook (now Meta Platforms Inc.), Apple Inc., Amazon.com Inc., Netflix Inc. and Alphabet Inc.’s Google. 

The original FAANGs took off during the pandemic when people stuck at home turned to the internet due to COVID-19 restricting them from work, stores and restaurants.  

Earlier this year, with the original FAANG stocks swooning and U.S. equities sliding into a bear market, Bank of America began promoting FAANG 2.0 based on industries expected to see strong growth rather than individual companies.  

The Strive FAANG 2.0 ETF might not launch until next year, and when it does, its prospectus indicates it will hold roughly 50 securities—meaning 10 securities to represent each industry. The document doesn’t indicate an expected expense ratio.  

In the meantime, investors might consider creating their own FAANG 2.0 portfolio from existing ETFs. Constructing a diversified and relatively low-cost portfolio might not be complicated. 

Fuel 

While the Energy Select Sector SPDR ETF (XLE) might seem like the obvious choice, its 23 holdings may not have the desired diversity. Investors might want to consider the Fidelity MSCI Energy Index ETF (FENY), which, at 0.08%, is 2 basis points cheaper than XLE and offers exposure to 116 companies.  

FENY’s $1.6 billion in assets is tiny compared with XLE’s nearly $42 billion, but it still shouldn’t present liquidity issues for buy-and-hold investors. Both have one-penny spreads, and the average spread in terms of percentage is 0.05% for FENY and 0.01% for XLE. 

Aerospace & Defense 

Three ETFs with more than $1 billion in assets cover aerospace. The largest is the $3.9 billion iShares U.S. Aerospace & Defense ETF (ITA), which costs 0.39%. The $1.2 billion SPDR S&P Aerospace & Defense ETF (XAR) is the cheapest, at 0.35%. ITA offers exposure to 39 securities, versus the 34 in XAR’s portfolio. ITA also has exhibited far better performance than XAR, eking out a positive return of 1% year-to-date versus a nearly 12% decline for XAR. 

The $1.5 billion Invesco Aerospace & Defense ETF (PPA) offers exposure to a portfolio of 56 stocks and is up 2% year to date, but it has an expense ratio of 0.61%, and lower trading volume and wider spreads than ITA.  

Agriculture 

An obvious choice for the agriculture space might be the $1.4 billion VanEck Agribusiness ETF (MOO). The fund has been around since 2007, and so far this year it’s lost 7.64%, much less than broader global equity markets.  

Investors may also want to consider the $303.4 million iShares MSCI Global Agriculture Producers ETF (VEGI), as it has even better performance (up more than 6% year to date) and an expense ratio of 0.39%, cheaper than the 0.52% charged by MOO. Despite being significantly smaller, the trading volume and spreads for the two funds aren’t that different.  

Nuclear 

While a few choices exist for an ETF covering the nuclear industry, the largest is priced between the cheapest and most expensive funds in the arena, at 0.69%. The $1.6 billion Global X Uranium ETF (URA) covers 47 holdings, offering the broadest coverage in the space, as well as considerable liquidity. 

Gold & Other Metals 

The final pillar of FAANG 2.0 may be best represented by the $1.9 billion SPDR S&P Metals & Mining ETF (XME), which offers exposure to miners of precious and industrial metals. The fund comes with an expense ratio of 0.35%. Its portfolio includes 36 holdings.  

Final Thoughts 

The five ETFs that can be selected to represent each of the FAANG 2.0 categories, if equally weighted, provide an average expense ratio of roughly 0.45%. That’s not at all outrageous for a portfolio of sector/industry funds, though there is some extra work if one wants to rebalance to that equal weighting periodically.  

In terms of performance, the SPDR S&P 500 ETF Trust (SPY) was down nearly 19% last week, while four of the five ETFs in the FAANG 2.0 portfolio were in positive territory. The funds in the portfolio saw year-to-date returns as of last Wednesday ranging from -7.5% (URA) to 64.7% (FENY). That averaged out to a return for the five funds in the portfolio of 15.1%, which is very appealing relative to the broad market.  

  

Contact Heather Bell at [email protected] 

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