Always Look Under The Hood

Posted on July 27, 2018 by Gemmer Asset

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“FANG” has become a popular term in finance circles over the past few years (or more recently “FAANG”). It’s an abbreviation for 4 (or 5) major US tech companies Facebook, Amazon, Netflix and Google – the second A in “FAANG” stands for Apple. And because these days there is an ETF for everything (see here and here), there is an ETF for this new acronym – its ticker is of course: FNG.

 

This new ETF from AdvisorShares is actively managed, so let that be a preamble to what I’m about to say…

 

By now you may have heard that Facebook’s stock hit a bit of a rough patch over the last 24 hours. They reported earnings and while EPS was fine, revenue and user growth both disappointed. You can read more here. If you happened to hold the FNG ETF, you may have panicked, thinking it’d be down big after FB’s drop. After all, it’s the F in FNG, right?

 

It turns out the managers of the ETF sold their entire position in Facebook during the Cambridge Analytica scandal in March of this year.

 

 

Bloomberg notes that this isn’t the first time the fund has done something like this:

 

“It’s not the first time adjustments to FNG’s holdings were affected by earnings. Earlier this year, FNG unloaded its Apple position, which had accounted for almost 4 percent of the fund at one point, right before the tech giant posted earnings that showed a growing services business and featured a bullish revenue forecast. Additionally, the fund didn’t hold any Google stock between May 24 and July 16.”

 

OK, so the A for Apple isn’t in the ETFs ticker, so maybe we can cut them some slack… but Facebook?? Maybe all these active moves have helped performance… After all, missing out on a -20% drop is certainly a good thing. Well, not so much… Here is a total return chart of FNG versus the NYSE’s FANG Index over the past 12 months.

 

 

FNG is lagging by 40%! In one year! And if you compare the +4.6% return of the FNG ETF to the average return of the 4 FANG stocks (which includes Facebook’s -19% drop yesterday), the relative performance is even worse.

 

 

What if Facebook had knocked their earnings numbers out of the park? If you owned FNG and weren’t aware of their daily holdings, you’d be reasonable in assuming your position in the ETF would benefit from a pop in the stock. Best case, the “FNG” ticker is a bit misleading.

 

Bottom line – always, always, always look under the hood of your investments. Things aren’t always what they seem.

 

 

 

 

Published by Gemmer Asset Management LLC The material presented (including all charts, graphs and statistics) is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The material is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objective, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this material is suitable for their particular circumstances and, if appropriate, see professional advice, including tax advice. The price and value of investments referred to in this material and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or prices of, or income derive from, certain investments. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Gemmer Asset Management LLC (GAM). Any mutual fund performance presented in this material are used to illustrate opportunities within a diversified portfolio and do not represent the only mutual funds used in actual client portfolios. Any allocation models or statistics in this material are subject to change. GAM may change the funds utilized and/or the percentage weightings due to various circumstances. Please contact GAM, your advisor or financial representative for current inflation on allocation, account minimums and fees. Any major market indexes that are presented are unmanaged indexes or index-based mutual funds commonly used to measure the performance of the US and global stock/bond markets. These indexes have not necessarily been selected to represent an appropriate benchmark for the investment or model portfolio performance, but rather is disclosed to allow for comparison to that of well known, widely recognized indexes. The volatility of all indexes may be materially different from that of client portfolios. This material is presented for informational purposes. We maintain a list of all recommendations made in our allocation models for at least the previous 12 months. If you would like a complete listing of previous and current recommendations, please contact our office.

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