FINX: Concentrated Exposure To The High-Growth Potential FinTech Sector

Summary

• FINX looks to track the investment performance of the Indxx Global FinTech Thematic Index (“Underlying Index”).
• The ETF invests in financial and technology companies looking to transform financial businesses through the use of digital and mobile solutions.
• The global pandemic has accelerated the adoption of FinTech solutions by reducing the need for human interaction.
• Looking for a helping hand in the market? Members of The Lead-Lag Report get exclusive ideas and guidance to navigate any climate. Get started today »

The Global X FinTech Thematic ETF (NASDAQ:FINX) looks to invest in companies with a leading edge in the emerging financial technology sector. This includes companies developing innovative products to transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions.

The ETF offers investors access to high-growth potential companies developing and applying technological innovations to disrupt and improve the delivery of financial services.

Given the rapid advancements in technologies such as blockchain & artificial intelligence, many analysts expect the global FinTech market to become a $400bn+ industry by 2025.

Let’s breakdown FINX’s portfolio to get a better understanding of the type of exposure it has.

Over the last year, FINX has significantly outperformed the broader market, delivering returns of over 56%.

As the pandemic began to gather speed, more people stayed at home and leveraged technology to carry out their financial transactions. Traditional banking institutions which did not develop robust digital and mobile solutions struggled to serve clients during government-imposed lockdowns. In the future, we can expect these institutions to actively seek out FinTech partners to build out their legacy systems, providing further growth impetus for FinTech players.

Constituent Holdings

Over 80% of the fund is invested in Information Technology companies. FINX has 47 holdings, and its Top 10 holdings make up 55.25% of the entire portfolio.

Source: Seeking Alpha

FINX’s most significant exposure is digital payments provider Square (SQ), with an 8.28% allocation. Square has developed various point-of-sale (POS) products that allow customers to pay with credit cards, mobile wallets, and wearables. Furthermore, it has recently broadened its offerings to include a business lending platform, a cash transfer app, customer and inventory management software, and an eCommerce website platform. Its success tells us how critical payments solutions are for small and medium-sized enterprises, which are expected to continue to drive its growth in the future.

The 2^nd most significant exposure is to Afterpay (OTCPK:AFTPF) (7.78%), an Australian-based FinTech firm offering “buy now, pay later” solutions. Users can shop online with Afterpay-affiliated associates and pay for products in installments instead. So how is this different from traditional credit card payments? Afterpay does not charge interest on these payments. Investors might ask how this company makes money. It does so by charging merchants a 5% processing fee. Though this amount is higher than standard processing fees, merchants can sell more volume than they would have otherwise, making Afterpay a win-win for consumers & merchants.

Other notable holdings in FINX’s portfolio include online payments system provider PayPal (PYPL), New Zealand-based cloud-based accounting software platform, Xero (OTCPK:XROLF), and Fiserv (FISV), an American provider of technology solutions to banks, credit unions, securities processing organizations, and insurance companies.

Over 52% of the fund’s exposure is to U.S. companies, followed by Australia and Brazil with 9.8% and 8.9% allocation, respectively. What’s interesting to see is that the fund also has exposure to emerging markets such as Brazil and China. Traditional banking institutions have historically underserved emerging markets, and now, FinTech companies have the opportunity to change that.

What Are the Risks to Be Considered?

IT sector risk: Given that over 80% of FINX’s assets are invested in companies operating in the IT sector, it is exposed to sector-specific risks such as rapid changes in technology product cycles; rapid product obsolescence; government regulation; and increased competition, both domestically and internationally, including competition from foreign competitors with lower production costs. Information technology companies and companies that rely heavily on technology tend to be more volatile than the overall market and are heavily dependent on patent and intellectual property rights.

The Bottom Line

Global financial services industry is witnessing a technological revolution that will fundamentally disrupt and re-shape legacy business models. These firms are using enhancing their capabilities to transform the financial services industry as we know it. Segments such as crowdfunding, blockchain, finance & insurance software, mobile payments, peer-to-peer (P2P), and marketplace lending are some of the new areas of application for these firms.

Technology allows FinTech companies to provide solutions to unbanked and underserved populations. Companies such as Square in America and PagSeguro (PAGS) in Brazil have offered affordable hardware that helps small & medium-sized sellers convert mobile devices into payment and point-of-sale (POS) solutions.

We also have free investing apps and Robo-advisors, which help bring wealth management services to those with limited account balances. For many years traditional banks have failed this demographic by developing scalable business models to suit their needs.

This dynamic will continue to evolve and change with the advent of more FinTech firms. There is a long way to go for these companies, and investors would be wise to invest some of their assets into such companies. FINX has a well-diversified portfolio within the FinTech space and will likely continue to outperform the broader market in the years to come.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This writing is for informational purposes only and Lead-Lag Publishing, LLC undertakes no obligation to update this article even if the opinions expressed change. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. It also does not offer to provide advisory or other services in any jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Lead-Lag Publishing, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

Comments

[User 50077887]

This fund has come down quite a bit with the rest of technology. I’ve been waiting for that correction. There may be more to go, maybe significantly so but I opened a position today. I like the international exposure this fund has over the ARKF offering. Will be looking to add more on further weakness.

[katmandu100]

Good data and COMMENTARY.

[dwitzany]

Thanks for the article. It is difficult to get inspired by your endorsement when you don't have a position in this ETF.
Disclosure: I DO have a position, and I like this for many reasons. One reason (@ A-ASTON) is that while I have other ARK funds, I thought it was good to NOT have too many ARK funds, giving me a secondary form of diversification in this highly charged sector.

[A-ASTON]

ARKF outperforms FINX.