As tech stocks continue to drive robust U.S. equity returns, some lingering questions remain: Can strong fundamentals in tech justify the ever-growing valuations of these companies? To what extent are single stocks supporting sector returns? Here, an analysis of return contributions from the NYSE® FANG+® Index (“NYFANG Index”) and specific metrics like growth and momentum may go some way to providing insight.

The NYFANG Index, also known as the NYSE U.S. Big Tech 10 Index, is a rules-based, equal-weighted equity benchmark designed to track the performance of 10 highly-traded growth stocks of technology and tech-enabled companies in the technology, media & communications and consumer discretionary sectors.1

Since being launched in September 2017, the NYFANG Index has provided exposure to several of the fastest growing and top performing companies in the U.S. equity markets. A subset of the companies in the NYFANG Index have been referred to as the Magnificent 7 (“MAG 7”) since early 2023. The MAG 7 is a group of large, high-performing technology companies consisting of Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA and Tesla.

As valuations of the companies contained in the NYFANG Index have risen, they have continued to drive both the returns of technology and tech-related sectors as well as the broader U.S. equity markets.

As of the close of July 5, 2024, the NYFANG Index was comprised of the following stocks:

These current weights don’t display the full picture, however. The NYFANG Index undergoes a quarterly reconstitution after the close of the third Friday of March, June, September, and December at which time the ten constituent stocks are all equally weighted to 10%.2 Thus, the weights are a function of the relative price movement from the close of June 21, 2024 to July 5, 2024, a period of time marked by a relative pullback in the price of NVDA and recovery in the prices of TSLA and SNOW.

Analyzing the NYFANG Index over longer periods shows a different story. For example, as of July 5, 2024, the NYFANG Index had returned a year-to-date (YTD) gross total return of 39.35%. Single stock contributions show that more than one-third of that return was attributable to NVDA, which rose over 154% during that period and contributed 13.86%. Nearly two-thirds of the NYFANG Index return, or 24.97%, was attributable to three stocks, NVDA, META and AVGO, the latter which is not a part of the MAG 7 group.

While the performance of the NYFANG Index in 2024 has been concentrated in a select few names, the story over a longer period spanning 2023 and 2024 (YTD) shows a more well-diversified source of NYFANG Index returns. From December 30, 2022 to July 5, 2024, NVDA returned a cumulative gross total return of over 761%. That contributed nearly a quarter (40.89%) of the NYFANG Index cumulative return (173.75%). As in 2024, the second highest contributor of NYFANG Index return was sourced from META (30.42%). However, after that, the return distribution was more even across the stocks of AMZN, NFLX, GOOGL, TSLA, AMD, MSFT and AAPL (10% to 16% of contribution to return). Out of this list, NFLX and AMD are not MAG 7 constituents, with the latter not showing in the 2024 NYFANG analysis above because it was replaced with AVGO in the September 2023 reconstitution.

The AVGO/AMD replacement raises an interesting point relating to the NYFANG Index methodology.3 Unlike the MAG 7 group of companies, or the well-known FANG, FAANG or FAANMG groups,4 the NYFANG Index allows for a dynamically changing composition in reconstitutions by qualifying four companies in addition to the core FAANMG names based on a ranking of the following four factors:

Securities from selected sub-industries in the Consumer Discretionary, Media & Communications and Technology sectors, including various software, hardware, internet and tech-related services categories, are ranked based on these factors, with the size and liquidity factors receiving a 35% weight each and the P/S ratio and sales growth factors receiving a 10% weight each in the overall rank. It is essential to highlight that companies with a higher P/S ratio receive a higher rank, as the factor is intended to filter out those companies that the market has attributed a premium to for expected future growth.5

More broadly, the NYFANG Index companies, along with other technology and tech-related stocks, have become a key driver of overall U.S. equity market returns. This is evident when performing a similar return contribution analysis on the NYSE U.S. 500 Index (“ICEUST5 Index”), which is part of the broader NYSE U.S. 3000 Index Family. The ICEUST5 Index is a rules-based, float-adjusted market capitalization-weighted broad U.S. equity index with the objective of measuring performance of the top 500 listed U.S. companies as ranked by unadjusted market capitalization.6

Since the end of 2023, eight of the top nine contributors to the ICEUST5 Index return consisted of NYFANG Index companies. These are led by NVDA, which had an average weight in the ICEUST5 Index of 4.74% and contributed more than a quarter (4.54%) of the cumulative ICEUST5 Index return (17.67%). Looking down further, nine of the top 12 contributors consist of NYFANG constituent companies, including two stocks (AVGO, NFLX) not in the MAG 7. These nine companies had an average total weight in the ICEUST5 Index of just over 30%. Yet, due to their high performance, they also contributed nearly two-thirds of that cumulative YTD index return (11.69%).

Looking back further to the end of 2022, we see this is a continuation of the same story. Eleven of the top 14 contributors to the ICEUST5 Index return from December 30, 2022 to July 5, 2024 consisted of NYFANG Index constituent companies (AVGO replaced AMD in the NYFANG Index in the September 2023 quarterly reconstitution). Of these 11 companies, three are not found in the MAG 7 (AVGO, AMD, NFLX). These 11 companies had an average weight of nearly 30% and contributed nearly two-thirds of the overall ICEUST5 Index return (32.49% of 49.81%). The top contributors over this longer horizon were more evenly distributed, still led by NVDA (7.78% contribution) but also including MSFT (5.66%) and AAPL (5.15%). In contrast to the 2024 situation, where it was the third lowest contributor to return in the entire index, TSLA was the tenth highest contributor to the ICEUST5 Index return during this longer timeframe.

Putting aside the constituent and index returns, ultimately, the NYFANG Index provides exposure to a group of companies that exhibit certain factor tilts as compared to the broader equity markets as represented by the ICEUST5 Index. As of July 5, 2024, the NYFANG Index includes companies that are larger, but also more volatile and with a higher beta as compared to the ICEUST5 Index. Naturally, for a tech-oriented index, it also has much higher value ratios (price to book / earnings / cash flow / sales) and a lower dividend yield as compared to the ICEUST5 Index. However, it tilts positively on various momentum, growth (historical and estimated sales / earnings) and even certain quality metrics.

To recap, despite recent uncertainty in the geopolitical and economic backdrop, the NYFANG Index and other tech-related equities continue to drive U.S. equity returns. This situation has been marked by ever-increasing valuations of these companies, but also strong fundamentals underlying them with new opportunities arising across artificial intelligence, machine learning, cloud computing, internet, and robotics. Today, when analyzing broad-based indices like the NYSE U.S. 500 Index, it is important to understand that groups of stocks such as the MAG 7 and constituents of long-tenured indices like the NYSE FANG+ Index continue to be key exposures within these market indices, with their relatively higher weights having a greater chance to impact index returns.