The Global X FinTech ETF (NasdaqGM: FINX) and its fintech brethren continue outpacing traditional financial services fare this year and there are some important factors indicating that that trend can continue.
FINX seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Indxx Global Fintech Thematic Index. The underlying index is designed to provide exposure to exchange-listed companies in developed markets that provide financial technology products and services, including companies involved in mobile payments, peer-to-peer (P2P) and marketplace lending, financial analytics software, and alternative currencies, as defined by the index provider.
One reason FINX is outperforming is the robust return on equity (ROE) found with many fintech companies. Goldman Sachs recently highlighted the benefits of owning high ROE firms in the current market environment.
“In this continuous slowdown, Goldman is advising clients to buy stocks with the fastest expected return-on-equity growth. ROE is a measure of profitability that is calculated by dividing net income by shareholders’ equity,” reports CNBC.
FINX Holdings Look Good on an ROE Basis
At least a pair of FINX holdings – Fiserv Inc. (NASDAQ: FISV) and Fidelity National Holdings (NYSE: FIS) – score well in terms of ROE growth. The average ROE growth between the two fintech companies is expected to be 20.5 percent this year, a percentage surpassed only by Global Payments (NYSE: GPN).
Fiserv and Fidelity National are the largest and third-largest holdings, respectively, in FINX, combining for over 18% of the fund’s weight, according to issuer data.
“Record-high leverage, lower interest expense, and the lowest effective S&P 500 tax rate of the last 50 years did little to offset the weight of lower margins on ROE,” according to Goldman Sachs.
The payment processing space is seeing a growing number of big bets placed by venture capitalists, which could give financial technology ETFs a boost. It’s a $1.9 trillion industry that the largest tech firms are trying to tap into.
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.
FINX components are shifting financial services and economic transactions to technology infrastructure platforms, ultimately revolutionizing financial services by creating simplicity and accessibility while driving down costs.
For more on thematic ETFs, please visit our Thematic Investing Channel.
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.