Are Amazon and Google technology companies?

When you think of large technology companies, you probably think of companies like the so-called FAANG stocks: Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), Google (GOOG). Not a bad starter list of highly successful “tech” companies.

But from an investing standpoint—of the 5 FAANG stocks—only Apple Inc. is considered part of the Information Technology sector. You would be sadly disappointed if you bought a technology sector ETF (such as the Vanguard Information Technology ETF (VGT) or Technology Select Sector SPDR Fund (XLK)) hoping to gain exposure to these “tech” companies.

Asset management firms that create and manage ETFs and mutual funds, generally follow the Global Industry Classification Standard (GICS) when determining which companies fall within a given industry sector.

The information technology sector “is made up of companies in the following three general areas:

• • • internet services and infrastructure companies, including data centers and cloud networking and storage infrastructure;
    • companies that provide information technology consulting and services, data processing, and outsourced services;
    • technology hardware and equipment, including manufacturers and distributors of communications equipment, computers and peripherals, electronic equipment, and related instruments; and semiconductors and semiconductor equipment manufacturers.” (Vanguard)

If Not Tech, Then What?

As odd as it might seem, three of the FAANG stock are classified in the Communication Services sector (sector #50), including: Google (i.e., Alphabet), Facebook, and Netflix.

To quote Vanguard: “The communication services sector is made up of companies that provide communications services primarily through a fixed-line, cellular, wireless, high bandwidth, and/or fiber-optic cable network and offer related content and information through various media.”

To gain exposure to these three companies, you would look for a Communications sector ETF such as the Vanguard Communication Services ETF (VOX).

Amazon’s Not a Tech Company Either

Amazon.com, the remaining FAANG stock, is classified in the Consumer Discretionary sector (sector #25).

This “sector is made up of those manufacturing and service industries that tend to be the most sensitive to economic cycles. Its manufacturing segment includes the following industries: automotive, household durable goods, textiles and apparel, and leisure equipment. The services segment includes hotels, restaurants and other leisure facilities, and internet and direct marketing retail companies.” (Vanguard)

The Vanguard Consumer Discretionary ETF (VCR) provides exposure to this sector.

Understand What You Own

The fact that companies commonly considered “tech companies” are not part of the investment world’s tech sector is a perfect example of needing to understand what you own. The name of an EFT, mutual fund or investment strategy may not reflect what you believe it does.

Before investing, always make sure you understand what you are buying.

If buying an individual stock, understand what the company does and how they make money. If buying a fund (ETF or mutual fund), know what the investment strategy is and how that is reflected in the portfolio holdings.

How to Buy Main Street Tech Exposure

Alas, there are ETFs that provide exposure to a more mainstream set of technology companies.

At Wealth45 we do not advocate trying to pick the next winning sectors. Although most ETFs do eliminate much of the idiosyncratic risk of owning individual stocks, with a sector ETF, you still have concentrated exposure to a group of similar companies. And large U.S. technology companies are not exactly cheap right now.

But if you are still interested, here are a couple of ETFs that provide more exposure to FAANG-type tech stocks than the above-mentioned information technology sector funds:

• Investco QQQ Trust (QQQ) – Apple, Amazon, Facebook and Alphabet (Google) are all among the funds top 5 holdings. Expense ratio of 0.20%.
• First Trust Dow Jones Internet Index Fund (FDN) – Amazon, Facebook, Netflix, Alphabet (Google) are among the funds top 6 holdings. The fund is expensive for a sector fund with an expense ratio of 0.52%.

Or Just Buy the Market

Alternatively, you can just buy the market. Or specifically, invest in an S&P 500 index fund.

Currently, the top 5 holdings— representing over 20% of fund assets—in an S&P 500 fund are: Apple, Microsoft, Amazon.com, Alphabet (Google), and Facebook. Not a bad representation of main street technology companies.