The Global X FinTech ETF (FINX ) is up nearly 30% year-to-date and is trouncing traditional financial services exchange traded funds along the way. Underscoring the fintech ETF’s strength is its May gain of 0.53%, impressive when considering many sector funds and the broader market are trading lower this month.
FINX, which is nearly three years old, tracks the Indxx Global FinTech Thematic Index. The fund “seeks to invest in companies on the leading edge of the emerging financial technology sector, which encompasses a range of innovations helping to transform established industries like insurance, investing, fundraising, and third-party lending through unique mobile and digital solutions,” according to Global X.
Electronic and mobile payments are expected to be key drivers of fintech growth in the coming years and it appears some market observers are awakening to the potential offered by some FINX holdings.
“Despite countless efforts from tech companies, just one payment start-up — PayPal Holdings (PYPL) —has managed to achieve any kind of similar scale, and it succeeded by focusing on the periphery of Visa and Mastercard’s world,” reports Tae Kim for Barron’s. “PayPal has become Visa and Mastercard’s counterpart in e-commerce. It is accepted by 22 million merchants and used by 277 million users.”
PayPal is the largest holding in FINX at a weight of almost 7%.
Fintech allows financial firms to leverage cutting edge technology to reduce costs, improve decision making and risk controls, remove middlemen and enhance customer experiences. A thematic approach includes investments that stand to benefit from structural change driven by demographic and technological changes
“Payment companies ultimately benefit from the network effect of linking merchants, consumers, and banks,” according to Barron’s. “That network is defended by a moat of regulation, security, and fraud protection that no tech company wants to deal with. Network effect is an economic concept that explains how a product becomes more valuable as more people use it.”
PayPal’s moat and scale are essential to that stock’s story.
“PayPal has become an essential arms merchant for retailers trying to compete online against Amazon.com (AMZN),” notes Barron’s. “PayPal’s digital wallet carries across the internet, so customers don’t need to re-enter payment and address information with every order. That reduces the friction that often causes consumers to abandon their shopping carts.”
For more information on thematic ETFs, visit our Thematic Investing Channel.