Nasdaq-100 or FANG+? Which US tech index should aggressive investors opt for?

The current imbroglio on international funds (the freeze on inflows by mutual fund houses that invest your money abroad due to exhaustion of Reserve Bank of India limits) has gone on for a bit too long.

Although a limited, albeit temporary, window opened last month when the capital market regulator, Securities and Exchange Board of India allowed funds to open their doors, only if they have sold any foreign securities, this was a small and limited window. Hence, any discussion on international funds, or any advice on where and how to invest internationally, may seem a bit out of context. But we’re confident that this limit will get expanded someday – sooner rather than later – and so it’s important to keep this discussion going.

Investing internationally is an important piece of diversification. As I wrote about international funds allocation, having a US-based international fund is good enough for most as the US is a good representative of the developed markets.

Within the US market, one can go for the broader S&P 500-based funds. Or if one is willing to take a greater risk and accept higher volatility for potentially better returns, then Nasdaq-based funds can be considered.

Also | Four international funds that are still open for investment

When you invest in US indices, it’s not just about getting geographical diversification in your portfolio. It’s also a play on rupee depreciation, which over the years, has been beneficial for Indians investing in international equities.

These days, there is another interesting option available for those looking for aggressive investments in US tech stocks – the NYSE FANG+ Index. It is less diversified than the Nasdaq-100 but still comparable as both focus on tech stocks heavily.

Nasdaq-100 vs FANG+

The Nasdaq-100 index is primarily a technology-dominated index. The index is made up of the 100 largest US and non-US stocks. Some of the world’s most innovative and famous companies such as Apple, Google, Amazon, and Facebook, are a part of it.

The NYSE FANG+ index is an equal-weighted index made up of 10 tech stocks. The acronym FANG (or now FAANG) stands for Facebook (Meta), Amazon, Apple, Netflix and Google (Alphabet). In addition, there are five tech-enabled companies in the index, namely, Tesla, Microsoft, Nvidia, Alibaba and Baidu. The weights change due to price movements but once every quarter, the weights are reset to 10 percent each.

Also read | New limits for international funds to be redemption-based

Here are a few points to note about the difference between the two indices:

· Nine of the 10 FANG+ index stocks are also part of the Nasdaq-100. So basically, the Nasdaq contains almost 90 percent of the FANG+ index plus 91 other stocks.

· The Nasdaq-100 is more diversified than FANG+ but still a lot less diversified than the S&P 500 index.

· And what is the weight of the FANG+ stocks in the Nasdaq-100? It’s 45-46 percent, though it changes daily.

· Since the Nasdaq-100 itself is a tech-heavy index and FANG+ is fully tech-oriented, both might come under the high-risk category. Due to its heavy concentration in just 10 stocks, FANG+ is far riskier than the Nasdaq-100.

· Given the concentrated nature of the FANG+ index, it has beaten the Nasdaq-100 hands down historically. But there is a caveat. The index opened only in 2017 and has back-tested data only from 2014. So it’s not exactly a lot of reliable past data to pick between the two. But if you do look at the past data, then definitely FANG+ has outperformed the Nasdaq fairly easily. But remember, past performance may or may not be repeated in the future.

Some feel that FANG stocks are the growth engine of the Nasdaq. And that is true to an extent. But this also means that if things go wrong for the Nasdaq-100 (like the tech bubble burst of the 2000s), then it can go a lot more wrong for the FANG+ index due to its extremely high concentration in just a few tech stocks.

Should you invest in FANG+ Index?

The NYSE FANG+ is indeed an interesting play on getting exposure to the high-growth basket of the world’s biggest tech giants. But with just 10 stocks, it’s more of a basket of FAANG and a few other tech stocks for ease of exposure and not exactly a diversified index.

The Nasdaq-100, on the other hand, is much more diversified (though still less than S&P 500).

If you are particularly passionate about the FANG theme, then of course you can consider the FANG+ index for a small exposure. If not, it is far better to diversify your investments in the US markets via the S&P 500 or the Nasdaq-100. Or if you want (and are willing to complicate things a bit), then you can consider mixing the S&P500 and the NYSE FANG+ index. That way, you can maintain an overall diversified portfolio by investing in the S&P500 and give an additional push to high-growth tech titans via the NYSE FANG+.

As we discussed at the start, due to the limits set by the RBI, the international investment route via MFs is suspended at present, barring the small and temporary  window we spoke about. One way around this is to go for ETFs based on the Nasdaq-100 and FANG+. There is no restriction on buying ETFs as they trade on the exchanges. But one must be careful while investing in these ETFs. The reason being that some of these international ETFs, in recent times, began trading at a high premium to their net asset values (NAV). This price distortion was because the asset management companies were unable to create fresh ETF units on account of the regulatory restrictions. Now the NAV-Price disconnect has reduced substantially than what it was a a month or two back but still, at the time of buying these ETFs, do check the NAV and price individually to ensure there is not too large a difference due to liquidity issues..