Financial technology stocks and sector-related exchange traded funds have taken a beating as the risk of a recession and the sell-off in the growth style weighed on the nascent industry. However, some continue to maintain their long-term outlook on a potentially oversold market segment.
Year-to-date, the ARK Fintech Innovation ETF (ARKF) declined 60.2% and the Global X FinTech ETF (NasdaqGM: FINX) decreased 44.9%.
Concerns over rising interest rates, lackluster profits, untested business models, and an economy heading towards a potential recession have all contributed to a sharp sell-off in the fintech sector, the Financial Times reported.
Shares in recently listed fintechs have even plunged an average of over 50% since the start of 2022, compared to a 29% drop for the technology-heavy Nasdaq Composite.
Dan Dolev, analyst at Mizuho, noted that fintechs, especially digital payments companies, “the first part of the tech sector to benefit greatly from COVID, because everyone was stuck at home and buying stuff online.”
“Now they are overcorrecting to the downside ahead of other sectors too,” Dolev added.
Nevertheless, Dolev argued that a rebound could be on the horizon for many companies in the second half as year-over-year comparisons become more pleasing for value hunters.
Meanwhile, many investors remain staunch supporters of the fintech industry. Cathie Wood’s ARK Fintech Innovation ETF, one of the most popular funds by assets under management dedicated to the sector, has plunged this year, but net outflows remain less than $90 million, revealing a steady base of buy-and-hold investors. The outflows are only a drop in the bucket compared to the $2.7 billion in inflows over the previous two years. Investors even added a net $31 million to ARKF since the start of June.
“It’s likely that in the rest of 2022 we’re going to continue to see some of these companies face some pressures — rising rates are going to create challenges for companies on the lending side of things and [buy now pay later] in particular,” Pedro Palandrani, director of research at Global X, told the Financial Times.
“Despite the increased risks in the market, we’re only down about $40 million in net outflows year to date … it really shows that investors continue to believe a lot in this sector over the long term,” Palandrani added.
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