The financial services sector is often viewed as a value proposition, not a destination for investors seeking growth. Fintech is reshaping the growth proposition in the normally staid financial services sector and investors can tap that growth with exchange traded funds (ETFs), such as the Global X FinTech ETF (FINX).
FINX debuted in September 2016 and tracks the Indxx Global FinTech Thematic Index. While the ETF is not as seasoned as other traditional financial services funds, FINX reflects the growth opportunities available in the fintech space. For the two years ended March 11, 2019, FINX returned nearly 70 percent, topping the Financial Select Sector SPDR (XLF) by a margin of more than 7-to-1.
FINX follows the Indxx Global FinTech Thematic Index and is home to companies looking to “transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions,” according to Global X.
Financial disruptors residing on the FINX roster include Intuit Inc. (INTU), SS&C Technologies Holdings, Inc. (SSNC) and PayPal Holdings, Inc. (PYPL). That trio, which combines for over 18 percent of FINX's weight, is up an average of 29.37 percent over the past year.
These companies and others FINX components are driving positive change and disruption in everyday financial services.
“We’ve reached an inflection point in 'fintech,' where early disrupters are moving from challengers to industry leaders in their own right, as they expand their services, develop their brands, and increase market share,” according to Fortune.
Digital payments is one of the primary growth frontiers for the fintech industry, a trend expected to benefit FINX holdings such as PayPal and Square Inc. (SQ). As the chart below indicates, the value of digital payment transactions is expected to undergo exponential growth over the next several years.
A Conventional Approach
FINX is not a run-of-the-mill financial services ETF, but it is cap-weighted, meaning it uses a conventional weighting methodogy. That means larger fintech companies, such as Intuit and PayPal, command bigger percentages of the ETF's weight while stocks with smaller market values are less prominent on the FINX roster.
While some issuers of thematic ETFs eschew cap weighting, FINX investors could be well-served by that weighting scheme.
“While some might argue that in the aggregate smaller companies offer higher growth opportunities than larger companies and therefore warrant more exposure than a market cap weighting scheme offers, we do not always find this to be the case in disruptive industries,” according to Global X research. “Using history as our guide, recent powerful themes have demonstrated that larger companies enjoy enormous benefits due to economies of scale and network effects.”
The 37 holdings in FINX have weights ranging from 0.13 percent to 6.65 percent. The average market value of those holdings is $13 billion, putting FINX at the lower end of the large-cap spectrum.