Global X FinTech ETF or Ark Fintech Innovation ETF?
Thematic investing is all about “identifying powerful, disruptive macro-level trends” and then finding “the underlying investments that stand to benefit from the materialization of those trends.” That’s according to Global X, an expert in thematic investing that offers a range of exchange traded funds (ETFs) that track various themes, the dominant category being disruptive technologies.
Lately, investors have been pouring money into thematic ETFs while firms like Global X and ARK Invest reap the benefits. The elephant in the room for thematic ETFs is the inability for providers to agree upon which stocks ought to belong to which themes. Look no further than our recent piece on Which Robotics ETF is The Best One to Buy? which showed how three ETF providers could only agree on 18 stocks that they collectively considered to be “robotics stocks.” Today, we’re going to look at two ETF providers that have an even more difficult time agreeing on what stocks provide investors exposure to the exciting theme of FinTech.
Financial Technology (FinTech)
FinTech is what it says on the tin – applying technology to the antiquated financial industry which includes subcategories such as RegTech, LegalTech, and InsureTech. Technological innovation has managed to visibly change the entire structure of the financial sector. For example, there are no more brokerage commissions for retail investors because of a fintech startup called Robinhood.
Our focus on researching fintech companies has largely surrounded alternative assets which allow retail investors access to exciting new asset classes, and alternative data, which allows investors to make better investing decisions. Today, we want to look at how retail investors might get exposure to publicly traded companies that are using technology to transform all aspects of finance. (Note: you can spell this FinTech or fintech, and we’ll try to use fintech going forward for consistency – but no promises).
Global X vs. ARK Invest
Two of the world’s leading providers of thematic ETFs – Global X and ARK Invest – have ETFs that focus on the fintech theme. Today, we want to figure out which of these ETFs, if any, we’d like to hold in our Nanalyze Disruptive Tech Stock Portfolio. Let’s start by looking at expense ratios and assets under management (AUM) for each of these two fintech ETFs:
- The Global X FinTech ETF (FINX)
AUM: $738 Million
Total Expense Ratio: 0.68%
- The ARK Fintech Innovation ETF (ARKF)
AUM: $221 Million
Total Expense Ratio: 0.75%
Expense ratios for both ETFs are about the same, but FINX has about 3X the AUM as ARKF. They say you should follow the money, so that’s one vote of confidence for the Global X ETF. Let’s look at what stocks are being held by these two ETFs to better understand what we’re getting exposure to.
The ARK Fintech Innovation ETF
Square (SQ) – a company we looked at recently – is the largest holding for both ETFs, but after that, the similarities start falling fast. Only seven stocks are held by both of these ETFs, meaning we’re getting dramatically different exposures. It’s hard to believe that two large firms with extensive research capabilities can’t decide on which stocks are fintech stocks, but that seems to be the norm for disruptive tech thematic ETFs. With ARK’s ETF, we see some familiar names from the FAANG lot.
Nearly 32% of the stocks held in ARK’s fintech portfolio have a market cap greater than $100 billion. Some of these stocks hardly seem to provide pure-play exposure to fintech, names like Amazon, Apple, Facebook, NVIDIA, Pinterest, and Salesforce. (None of these companies are found in the Global X ETF.) It’s understandable why ARK would include large Chinese tech companies – JD.com, Tencent, and Alibaba – but all of these firms use VIE structures, which have raised some serious red flags. So far, ARK’s ETF doesn’t seem like an investment vehicle we would want to hold for pure-play fintech exposure, so let’s take a closer look at the Global X ETF.
The Global X FinTech ETF
The Global X FinTech ETF is quite concentrated with half the stocks accounting for over 81% of the total portfolio weighting. While we constantly preach about the merits of diversification, we like to see thematic ETFs taking a more active approach since that means – hopefully – that they’re overweighting the biggest pure-plays in whatever theme they’re trying to target. Most disruptive tech themes don’t have tons of pure-play stocks because the technologies are so new, but Global X has managed to find some interesting names that fall into the below fintech umbrella as defined by their underlying index provider, Indxx.
Here’s a look at the 16 financial technology stocks in the Global X ETF that make up over 81% of the portfolio’s holdings at the moment:
|8.47||SQ||SQUARE INC – A|
|6.77||ADYEN NA||ADYEN NV|
|5.87||PYPL||PAYPAL HOLDINGS INC|
|5.58||APT AU||AFTERPAY LTD|
|4.73||XRO AU||XERO LTD|
|4.70||BKI||BLACK KNIGHT INC|
|4.54||NEXI IM||NEXI S.P.A.|
|4.19||BILL||BILL.COM HOLDINGS INC|
|3.71||GWRE||GUIDEWIRE SOFTWARE INC|
|3.34||TEMN SW||TEMENOS AG – REG|
Square isn’t the only name we’re familiar with. PayPal (PYPL) is that digital payments company we try not to use because their fees are way too high. Xero (XRO:AU) is an economical accounting solution we use here at Nanalyze that we’ve written about before. Intuit (INTU) makes quite a few financial products you might be familiar with such as Mint, TurboTax, and QuickBooks.
You’d be excused for not hearing about two giant pure-play financial services technology firms on the list – Fiserv (FISV) and Fidelity National Information Services (FIS) – which have market caps of $67 billion and $90 billion respectively. It’s interesting that both these large companies are in the business of providing financial technology (remember, that’s what fintech stands for), yet you won’t find them on many lists of “top fintech companies.” We’re definitely going to take a closer look at both, and may write about them in future articles.
Then, there are the remaining companies which we haven’t come across before, so let’s take a peek at each one.
10 Global Financial Technology Stocks
Adyen (ADYEN) – a $57 billion Dutch firm offering a single payments platform to accept payments anywhere, on any device. Europe is their largest contributor to net revenue with 63%, followed by North America (18%), Asia-Pacific (10%), and Latin America (9%). (Also held in the ARK Invest Fintech Innovation ETF.)
Afterpay (APT:AU) – a $17 billion Australian firm that offers a “buy now, pay later” solution in Australia, New Zealand, United States, and the United Kingdom.
StoneCo (STNE) – A $16 billion Brazilian payments company serving approximately 495,100 Brazilian clients, primarily small-and-medium-sized businesses. Counts Warren Buffet and Ant Financial as investors.
Black Knight (BKI) – a $14 billion provider of software, data, and analytics for mortgage and home equity lending and servicing. The CEO used to be COO at Fidelity National Information Services which is where BKI originated from. Added artificial intelligence (AI) capabilities in 2018 with acquisition of HeavyWater.
Nexi S.p.A. (NEXI:IM) – “Italy’s Nexi SpA agreed to buy SIA SpA to create one of Europe’s biggest payment providers, adding to the wave of consolidation sweeping the continent’s financial services industry,” said Bloomberg yesterday about the $17.7 billion merger.
Bill.com (BILL) – An $8 billion provider of cloud-based software that simplifies, digitizes, and automates back-office financial processes for small and mid-sized businesses. Over 70% of the top 100 U.S. accounting firms use Bill.com.
SS&C Technologies (SSNC) – A $16 billion firm that’s the world’s largest hedge fund and private equity administrator, as well as the largest mutual fund transfer agency with more than 18,000 clients.
PagSeguro Digital (PAGS) – A $13 billion provider of financial technology solutions focused primarily on consumers, individual entrepreneurs, micro-merchants, small companies, and medium-sized companies in Brazil.
Guidewire Software (GWRE) – An $8 billion firm that provides an insurance software platform used by more than 380 insurers in 34 countries, names like Allianz, Zurich, MetLife, and Aviva. Claims R&D team is largest in industry. (Also held in the ARK Invest Fintech Innovation ETF.)
Temenos (TEMN:SW) – A $10 billion Swiss firm that provides banking software solutions used by over 3,000 banks in over 150 countries, including 41 of the world’s top 50 banks. Added AI capabilities last year with acquisition of Logical Glue.
If you had to sum up the 18 stocks that presently comprise over 81% of the weighting for The Global X Fintech ETF, you could characterize them as “a collection of global financial technology stocks,” which is exactly what we want exposure to. One can only assume that these large financial technology firms have their finger on the pulse of what’s happening in the fintech startup world, and are either acquiring technological innovation or replicating it.
Throughout this analysis, we didn’t mention performance once. As ARK Invest often points out, the real value for any disruptive technology needs some time to mature. These are stocks you should be looking at holding for at least half a decade.
At the moment, we’re looking for an ETF that offers concentrated pure-play exposure to international financial technology companies that are leaders in their domains. That ETF happens to be The Global X Fintech ETF.