Volatility has roiled the tech darlings — Facebook, Amazon, Apple, Netflix, and Google (“FAANG” stocks) — which were slugged by fallout from the pandemic in March, only to see stellar gains in the second quarter with momentum continuing through August. As these digital suppliers of home goods, social networks and entertainment experience ongoing volatility, tools which allow savvy traders to hedge their exposure are coming to the fore.
The NYSE FANG+™ index currently consists of 10 highly-traded growth stocks of popular technology and tech-enabled companies. The index is equally weighted and includes the five FAANG stocks along with Tesla, Ali Baba, Bidu, Nividia, and Twitter.
Alongside this index, ICE Futures U.S. offers FANG+ futures and NYSE Arca lists FANG+ options. Both provide trading opportunities and help investors manage risk. These tools are widely used by institutions, with market data fees waived for retail users of FANG+ futures as they continue to grow in popularity.
1. Individual trader-efficient trading opportunities: introducing Micro NYSE FANG+™ Index Futures
ICE Futures U.S. will reduce the multiplier and the effective contract size of FANG+ futures on September 28. Specifically, the multiplier will be reduced from $50 to $5 resulting in a contract value of ~$25,000. Open FANG+ futures positions will be increased 10 fold to insure that the notional value of outstanding positions will remain the same. Given the dramatic rise in the NYSE FANG+™ index this year, the Exchange believes that the new contract size is warranted and will appeal to a more broad based selection of participants.
On the same day, the name of the futures contract will be changed to Micro NYSE FANG+ Index futures to better represent the notional size of the product.
2. Effectively hedge your risk
As of the date of this article, the NYSE FANG+™ index currently consists of only 10 major tech and tech-enabled companies. Participants with exposure to these index constituents may use FANG+ Futures, which targets these index names, to manage this exposure. For example, an investor with a portfolio of FANG+ stocks may manage the risk of an anticipated downward move in the market by selling FANG+ futures.
The proper hedge ratio can be determined to offset losses in the underlying stocks in a capital and cost efficient manner without having to liquidate the portfolio. In a similar manner, FANG+ futures can be traded against a portfolio of select index components to effectively establish the desired exposure in the other index names. The current 10 stock index composition coupled with equal weighting provides a way for participants to efficiently fine-tune their strategies.
3. Avoid concentrated exposure
Equally weighted indexes mean investors avoid the concentration risk of large cap stocks in market-cap weighted indexes. This can be beneficial for hedging and trading purposes. It also allows investors to utilize actively traded FANG products to use equal weighting in their portfolios as a tilt or overlay strategy.
The 10% weighting of index components is allowed to drift between quarterly reset dates - a dynamic that may present opportunities that can be realized using a combination of FANG derivatives coupled with the underlying components and/or other index products.
Apple® is a registered trademark of Apple, Inc. Facebook® is a registered trademark of Facebook, Inc. Amazon® is a registered trademark of Amazon Technologies, Inc. Netflix® is a registered trademark of Netflix, Inc. Google® is a registered trademark of Google, Inc. Alibaba® is a registered trademark of Alibaba Group Holding Limited. Baidu® is a registered trademark of Baidu.com, Inc. Nvidia® is a registered trademark of Nvidia Corporation. Tesla® is a registered trademark of Tesla, Inc. Twitter® is a registered trademark of Twitter, Inc. S&P 500® is a registered trademark of Standard & Poor's Financial Services LLC. NASDAQ-100® is a registered trademark of NASDAQ, INC.
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NYSE FANG+™ Index is a trademark of ICE Data Indices, LLC or its affiliates ("ICE Data") and has been licensed for use in connection with the NYSE FANG+™ Index Futures. The NYSE FANG+™ Index Futures is not sponsored, endorsed, sold or promoted by ICE Data Indices, LLC. ICE Data makes no representations or warranties (i) regarding the advisability of investing in securities or futures contracts, or (ii) that any such investment based upon the performance of the NYSE FANG+™ Index particularly, or the ability of the NYSE FANG+ Index will track general stock market performance.