The ARK Fintech Innovation ETF (NYSEARCA: ARKF) is one of this year’s best-performing ETFs with exposure to the financial services sector and it’s leading the way by a wide margin.
One of the catalysts behind ARKF’s 22.16% 2020 gain is its large position in Square (NYSE: SQ). In fact, ARKF has the largest weight to the payment processor and Cash App purveyor among all ETFs. That’s meaningful now and over the long-term due to the exponential growth of Cash App.
“While Square’s seller ecosystem grew 10-fold from $100 million to $1 billion in annualized revenue in five years, Cash app is likely to accomplish the same in just 2.5 years,” said Ark analyst Max Friederich in a recent note. “Cash App generated roughly $100 million in annualized revenue in the fourth quarter of 2017 and is poised to eclipse $250 million, or $1 billion on an annualized basis, this quarter.”
An Evolving Payment Mechanism
As is being documented, the coronavirus is having a profound impact on how people conduct basic financial transactions and that’s opening doors for digital wallets like Cash App.
Payments are increasingly going digital with a number of start-ups seeing venture capital seed money to help facilitate online purchases. According to the research company Pitchbook, data shows that investors put $18.5 billion into the payment processing sector in 2018–an increase of five times the previous year.
“We believe Cash App’s growth is more impressive in the absence of several monetization levers it will be able to pull in the future. Stock purchases and cross-border payments, for example, are free, and likely to follow Cash Apps’ bitcoin monetization strategy,” notes Friederich.
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. ARKF’s allocation to Square also gives the fund some bitcoin exposure.
“Giving bitcoin time to penetrate Cash App’s user base, Square waited two years before charging fees for purchases,” writes Friederich. “In addition, Cash App’s Instant Deposit still charges 1.5% per transaction, well below the industry average, despite sell-side analysts advocating for higher fees to boost short-term revenue growth.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.