While munching on some Deepavali cookies, my close friend, who was seated beside me, blurted out:
“Dei! How to invest in Google da? I heard it’s a damn good company to invest in?”
With so much excitement, some of the murukku bits from his mouth flew out.
As he was picking up the mini-mess he had created, I belted out a 101 on investing in US shares and the FAANG stocks that Google is part of.
What are the FAANG stocks?
We are not talking about vampires here.
FAANG is an acronym for five companies that many of us are likely to be familiar with, and we most probably would have used its services before.
FAANG stands for:
- Facebook (NASDAQ: FB)
- Amazon.com (NASDAQ: AMZN)
- Apple (NASDAQ: AAPL)
- Netflix (NASDAQ: NFLX)
- Google – Google is now known as Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
Facebook owns the eponymous social media, Facebook, along with WhatsApp and Instagram. Amazon.com is the online retail giant that has revolutionised the way we shop. It is also the brainchild behind Amazon Web Services (AWS), an undisputed leader in the cloud-computing market.
Apple is the tech giant behind the iPhones that many of us carry while Netflix is an online content streamer that we have learnt to have our dinner with.
Last but certainly not the least, Alphabet owns Google, the only search engine that many go to. Alphabet also owns many other products that we use, such as Maps, YouTube, Chrome, Android, Google Play Store, Google Drive, and Gmail.
That leads me to the next point, which is the mindshare that these companies have.
The clout of these five companies is far-reaching that their products have become verbs. You don’t search for something on the Internet, you Google for it. Even Netflix has its own phrase with its “Netflix and chill” (that’s a story for another day!).
Performance Of The FAANG Stocks Over The Long-Term
With the strong business case going on for them, it’s not surprising that shares in Facebook, Amazon, Apple, Netflix and Google (Alphabet) have performed well.
In the last five years, the FAANG stocks have outperformed the S&P 500 index, a stock market index that measures the performance of 500 large companies in the United States. From October 2014 to October 2019, the S&P 500 index returned around 50%, but the FAANG stocks have produced returns of between 100% and 500%.
Why You Should Consider The FAANG Stocks?
The ultimate driver of the businesses behind the FAANG stocks are you and me. With the proliferation of the Internet, more people will shop on Amazon, Google for stuff, and watch shows on Netflix.
Research shows that Internet users now make up 57% of the global population, and on average, people spend 6 hours and 42 minutes online each day. The Internet user population will only grow as more people, especially those of rural areas, catch up with the broader society.
Many of the FAANG businesses also possess what is called a “wide moat”.
In his 1995 shareholder’s letter, the world-famous investor Warren Buffett revealed what he looks out for in businesses. He said:
“In business, I look for economic castles protected by unbreachable ‘moats.’ ”
The moat acts as a powerful deterrent to those considering encroaching the territory of a business. By investing in companies that are sticky with consumers, it ensures even more profits are produced by the firms when the consumer goes back for more.
Moats come in four main ways:
- High switching costs: When a user finds it too cumbersome to move from one product to another, the product has a high switching cost.
- Network effects: When a new user joins a service or uses a product, that service or product becomes more valuable.
- Low-cost producer: Such a producer offers the lowest cost to consumers and keeps them coming for more.
- Intangible assets: These assets include patents, government-regulated protection, and/or brand value.
In the case of FAANG stocks, their moats are as follows (non-exhaustive):
- Facebook – network effect.
- Amazon.com – network effect, low-cost producer, and brand value.
- Apple – network effect, high switching costs, and brand value.
- Netflix – somewhat high switching costs.
- Google (Alphabet) – low-cost producer and high switching costs.
Let’s use the world’s biggest social media platform, Facebook, as an example to illustrate its moat.
Facebook has a network effect going on for it as it’s hard to “move” our friends from Facebook to a new social media platform. Even Google+ had trouble upending the social media giant.
Where To Learn More About Those Companies?
Singaporeans who wish to invest in the FAANG stocks should understand more about the companies through their respective investor relations (IR) website. The IR websites provide detailed information about the company’s business, its financial performance, press releases, presentation decks, and many more.
- Facebook: https://investor.fb.com/home/default.aspx
- Amazon: https://ir.aboutamazon.com/investor-relations
- Apple: https://investor.apple.com/investor-relations/default.aspx
- Netflix: https://www.netflixinvestor.com/ir-overview/profile/default.aspx
- Google (Alphabet): https://abc.xyz/investor/
To get quick data on the past financial performance of the companies and also their latest valuation, you can check out Morningstar (not sponsored). Morningstar is a website I frequent for US stocks.
Risks You Should Note
The biggest uncertainty surrounding FAANG stocks right now is that of regulation.
You would know that Facebook was under intense scrutiny from regulators following the Cambridge Analytica data scandal. There is also growing support to break up the Big Tech companies, such as Amazon and Google.
There’s too much debate going on surrounding the break-up, whether it’s necessary or will it ultimately make things better. Whatever it is, investors should understand this risk if they are to invest in the FAANG stocks.
Another risk is that of valuation. Since the FAANG stocks are widely followed, they generally trade at high valuations.
For example, Amazon.com has a trailing price-to-earnings (PE) ratio of around 80, whereas the PE ratio of the S&P 500 index is at around 23. This could mean that Amazon.com is overvalued.
Having said that, it could be worth paying up for FAANG stocks given the wide moat and the huge runway for growth that they have. Investors have to balance the risks and rewards before investing in such stocks.
Instead of investing in the individual FAANG stocks, investors can also choose to invest in exchange-traded funds (ETFs) that have the FAANG stocks as part of them. Such FAANG ETFs allow investors to invest in the FAANG stocks and yet, remain diversified without putting all their eggs in one basket.
Examples of FAANG ETFs include Invesco QQQ (NASDAQ: QQQ), Vanguard Growth ETF (NYSEARCA: VUG), and SPDR S&P 500 Growth ETF (NYSEARCA: SPYG).
How To Buy The FAANG Stocks And ETFs As A Singaporean?
There are mainly two ways to invest in the US stock market, one is through the Singapore brokerages, and the other is through the US brokerages. For a complete guide on buying US shares from Singapore, you can check out our post here.
Singapore brokerages
| Brokerage | Min. Fees (US$) | Trading Commissions | Custodian Fees |
|---|---|---|---|
| CGS-CIMB Securities | 20 | 0.30% | S$2 per counter per month |
| Citibank Brokerage | 25 | 0.30% | 0.01% of your monthly average stockholding balance, up to a maximum of USD 100 every six months |
| DBS Vickers | 25 | 0.18% | S$2 per counter per month |
| FSMOne | 8.80 | 0.08% | No custodian fees |
| KGI Securities | 20 | 0.30% | None stated |
| Lim & Tan Securities | 20 | 0.30% | S$2 per counter per month |
| Maybank Kim Eng Securities | 20 | 0.30% | S$2 per counter per month |
| OCBC Securities | 20 | 0.30% | S$2 per counter per month |
| Phillip Securities | 20 flat fee | – | S$2 per counter per month |
| RHB Securities | 20 | 0.30% | S$2 per counter per month |
| SAXO Markets | 4 | 0.06% | 0.12% p.a. of stockholding balance, custodian fee calculated daily using the end of day values and charged on a monthly basis |
| Standard Chartered | 10 | 0.25% | No custodian fees |
| UOB Kay Hian | 20 | 0.30% | S$2 per counter per month |
Source: Seedly article
US brokerages
| Brokerage | Min. Fees (US$) | Trading Commissions | Maintenance Fees |
|---|---|---|---|
| Interactive Brokers | 1.00 | US$0.005 per share, up to a maximum of 1.0% of trade value | Up to US$10 per month (less commission paid that month), waived if account has greater than US$100,000 in average equity for a calendar month |
| TD Ameritrade | 10.65 flat fee | – | None |
Source: Seedly article
As a foreign investor, we are not subject to capital gains tax, but we have to be aware of the 30% withholding tax on dividends.
Want to discuss further?
Why not check out Seedly’s QnA and participate in the discussion surrounding the FAANG stocks.
The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. Readers should always do their own due diligence and consider their financial goals before investing in any stock. The writer may have a vested interest in the companies mentioned.
