FAMGA: Clever Acronym, Faux Diversification

As the old saying goes, don't put all your eggs in one basket. Investors attempting to diversify by investing in one large-cap index are, unknowingly, putting a significant portion of their eggs into one basket. 

The Nasdaq 100 — a $6 trillion index — might seem like a good way to diversify, but thanks to the surge in tech stocks, investors are more and more investing in the FAMGA, not the Nasdaq. FAMGA is an acronym for Facebook Inc (FB), Apple Inc (AAPL), Microsoft Corp (MSFT), Google (GOOG) and Amazon.com Inc (AMZN), the five biggest stocks in the Nasdaq that today make up an astonishing 40 percent of the 100 company index. 

The FAMGA has a combined market-cap of $2.7 trillion and is becoming the new barometer for tech stock dominance. A few years back, CNBC host Jim Cramer coined FANG (Facebook, Amazon, Netflix, Google), but with Apple now the biggest company in the world, Microsoft third and one of only two AAA rated companies left (the other being Johnson & Johnson), FANG is no longer the flavor of the month. 

However, as much as these acronyms sound fun, the sheer size is distorting diversification and analysis. "Take the internet advertising market. The good news is that according to the Internet Advertising Bureau (IAB), internet advertising was up 20% year-over-year in 3Q ’16," Lou Kerner wrote in his blog post. 

"The bad news is that, if you take FAMGA out of the equation, internet advertising revenue probably shrank for everyone else."

The FAMGA family has distanced itself from the field so much where Facebook—the smallest of the FAMGAs—is over twice the size of the sixth largest company in the Nasdaq, Intel (INTC). The winner-takes-all internet age has seen the FAMGA grow from 32.4 percent of the Nasdaq 100 in 2014, to 39.2 percent today.

Even with its imperfections, FAMGA investors aren't grumbling, year-to-date the five stock group has outperformed the other 95 components of the Nasdaq by 5 percent.