Index fund and FANG stocks question (percentage, pension, buying, companies)

[Bp25]

I'm trying to figure out the impact on S&P500 index when FANG stocks get pounded. If there is a significant investment in passive index funds based on S&P500, or relatively passive pension funds, then a reduced FANG valuation will only redistribute the money to other 496 stocks and the index itself should not be impacted much. If the passive investment percentage is small, then S&P500 will be impacted. Any thoughts on how this can be estimated? It's just for my understanding, not a research or class project

[SportyandMisty]

Let's take a look at the SPY top 10 holdings:



FANG is Facebook, Amazon, Netflix, and Google (now Alphabet)
Notice

Facebook is about 1.71%
Amazon is about 3.29%
Netflix is not among the top 10, and I'm currently too lazy to go to the actual source index to look it up, but under 1.38%
Google (the sum of GOOG and GOOGL) is about 2.99%

So, together, they sum to at most 9.37% of the SPY (assuming my fat fingers didn't mistype on my calculator).

Sooooo... pick your definition of "...when FANG stocks get pounded." Are you thinking 20%? 30%? 40%?

What would a pullback of 40% of 9.37% of an index result in?

[Bp25]

Ok, I was lazy and used FANG as a shortcut I should have used the top 4 holdings of SPY (apple, microsoft, amazon and google/alphabet). These 4 have disproportionately high percentage of assets (at or above 2.99%, 14.32% total) compared to the remaining 496 stocks (1.71% is the next highest. So what happens if these 4 get pulled back by say 40%. Does that mean that the index loses (40% of 14.32 =) 5.728%, or because there is so much money invested in the index funds that will be force distributed to other 496 stocks (the money will have to remain in the same 500 stocks) that the other 496 stocks will go up in value and therefore the effective pullback will be much less than 5.728%?


That's really what I'm trying to figure out.

[jiminnm]

I thought it was FAANG - Facebook, Apple, Amazon, Netflix and Google.

[ALackOfCreativity]

FAANG itself is about 10% as listed above.

The problem is that the problem is broader. A lot of other large caps look similarly stretched. KO, NKE, JNJ, MSFT, MA, etc. are more overpriced than even some of the FAANG stocks. GE was among the worst and the fever there broke but a lot of American large cap valuations do not make sense.

[lchoro]

It's FAANG, FANGMAN, and the industry groups of which these leading stocks are members and tend to trade in sympathy. The weighting of the leaders is around 15-20 percent, but the sectors they represent and the biotechs comprise around 35 to 40 percent of the S&P 500. Some of the tech stocks were recently reclassified as telecommunications and consumer discretionary to lower the visible weighting of technology due to the obvious comparisons with 2000. The small group of stocks are also around 50 percent of the Nasdaq.

[lchoro]

Post options expirations is usually down

Almanac Trader

According to the above, half the decline is probably over. Without daily one-percent declines, it's difficult to get the momentum to start a real pullback like February which was caused by a sudden supply of over 700 billion dollars in US treasuries overwhelming QE. It might have gone farther if the VIX hadn't spiked so wildly due to the low-volatility ETFs. FAANGs and large cap techs were big users of offshoring domestic profits. They've been buying back their share, while Bloomberg news has noted heavy put buying by insiders of these companies to protect the gains till year-end. The pre-election dip is probably going to be pretty minimal as in 2016.