FINX - FINX: Unattractive Dividends May Diminish Popularity Among Investors

2023-06-14 14:40:10 ET

Summary

• FINX provides investors with broad exposure to the emerging financial technology sector, investing in both technology and financial stocks.
• FINX has an extensive global focus, investing in over 10 countries, with three-quarters of its portfolio focused on the United States.
• I rate FINX a Sell because of its low dividend yield and extremely low dividend growth rate.

2022 was a year of historically slow growth for many industries, but primarily in the tech sector. With high interest rates, high inflation, and uncertain economic conditions, major tech companies were down over 35% in 2022 alone. Alongside tech, the FinTech industry also experienced a slowdown, with a significant drop in investment activity. Regardless, there are numerous FinTech applications in demand as society shifts towards a digital economic environment. Global X FinTech ETF ( FINX ) is a prominent ETF that provides exposure to the industry, focusing on both financial and technology companies.

With that being said, I rate FINX a Sell. While the industry is projected to experience long-run growth, I believe that there are inherent flaws associated with this ETF that make it unattractive to investors. For one, the fund offers very low dividends, with a track record of a decreasing dividend yield. Excelling in both capital appreciation and dividends should be a goal for an ETF that intends to reinvest its additional capital to create potential for long-run growth. This could also possibly explain why the fund has had little capital appreciation since its inception. As one of the oldest and largest FinTech ETFs, having low dividends alongside declining growth is enough to deter investors away from not only FINX but the entire FinTech industry as a whole.

Strategy

Launched and managed by Global X Management Company LLC, Global X FinTech ETF aims to provide investors with broad exposure to the emerging financial technology sector. The fund invests in a broad range of sectors within FinTech, including companies in mobile payments, marketplace lending, crowdfunding, enterprise solutions, blockchain and alternative currencies, and personal finance software. FINX invests in growth and value stocks, selecting and allocating its holdings through a market-cap weighting approach. Ultimately, the fund aims to provide returns that correspond similarly to the price and yield performance of the Indxx Global Fintech Thematic Index.

Holding Analysis

FINX primarily invests in 71 mid-cap and large-cap companies in the technology, financial, industrial, and healthcare sectors. Although FINX is classified as a FinTech ETF, its allocation is skewed heavily towards technology, with over 76% of the fund dedicated to this sector. This results in the ETF being more tech-oriented and less on its financial focus. Since the majority of the fund's stocks are either classified as tech or finance, the performance of this ETF can be susceptible to sector-wide shocks in either sector. FINX also has an extensive global focus, investing in over 10 countries while still focusing just less than three-quarters of its portfolio in the United States. The fund's top 10 holdings constitute over 50% of its entire portfolio. However, no single stock comprises more than 8% of the portfolio.

Strengths

One of FINX's key strengths is that it is the largest and oldest FinTech ETF among its closest peer competitors. Having been incepted in 2016, it has accumulated an AUM of over $383 million, whereas the second-highest AUM ETF among the bunch, IETC, is not even half of FINX's AUM. To be exact, FINX's AUM is 2.6 times as big as IETC's AUM.

On top of its impressive size, FINX is extremely liquid. With an Average Daily Share Volume of nearly 100,000 and an Average Daily Dollar Volume of over $2 million, FINX outperforms its competitors by a substantial margin. If we look at IETC who can most closely contend with FINX in this metric, FINX's Average Daily Dollar Volume is over 4 times larger than IETC. This is especially impressive considering that FINX's AUM is merely 2.6 times larger than that of IETC. This exceptional liquidity not only exemplifies FINX's popularity among investors but its large size and longevity in the market also add a layer of resilience during volatile market conditions.

Weaknesses

FINX has a relatively low dividend yield at 0.25%. It has an -89% differential to the median of all ETFs at 2.23%. When comparing FINX's dividend yield to its peers, FINX stands outs with the lowest yield ('TTM') among the bunch. The fund pays out its dividends twice a year, whereas its peers with higher dividends pay out quarterly. The only exception is KOIN, which pays its dividends annually. However, KOIN has an extremely high dividend yield ('TTM') at nearly 20%, but it's important to note that a significant portion of this yield may be attributed to one-time capital gains, which could potentially inflate the yield. It is unlikely that KOIN will maintain this exceptionally high yield going forward, as capital gains are typically not recurring.

Moreover, several of FINX's top holdings do not pay dividends, namely BILL Holdings ( BILL ), Block ( SQ ), Fiserv ( FI ), and PayPal Holdings ( PYPL ). Regardless, I believe that it is important to evaluate this growth-focused fund through dividends in addition to its long-term growth potential. As the FinTech industry matures and the companies in the ETF expand their operations and profitability, there is a possibility that some of them may initiate or increase dividend payouts in the future. Companies often start paying out dividends when they reach a certain level of stability and probability, and the majority of the companies within this fund have not reached this level yet.

What strikes me most about FINX is its Dividend Growth Rate ('TTM'). The fund has an alarming growth rate of nearly -100%, which contrasts starkly with the median for all ETFs at slightly over 15%. This indicates that the fund has generated significantly less income over the past year, which is a red flag for income-focused investors. On top of this, the fund has not performed favorably among its peers in the past year either and is also significantly trailing the S&P 500. The fund also has not performed well historically. In both a 3-year and 5-year outlook, its Total Return has been -30% and -15%, respectively. Historical performance is a crucial indicator to consider when evaluating a fund's long-term potential. Its consistent underperformance throughout the years, especially when the S&P has offered positive returns over the same periods, makes it hard for me to believe that the fund is strong enough to upend this long-term downtrend. FINX ultimately provides no upside for investors, with neither capital appreciation nor income and dividend growth.

Opportunities

While the FinTech industry may have lost over half of its market value in 2022, this drop was only a cyclical and short-term downturn caused primarily by macroeconomic headwinds. The industry still has a very favorable future growth trajectory. According to a report by the Boston Consulting Group, the overall industry is projected to be growth from $245 billion to $1.5 trillion by 2030. Currently, FinTech only holds a 2% share of the $12.5 trillion global financial services industry, but this number is expected to grow to around 7% by 2030.

Moreover, the rise of AI and machine learning has the potential to revolutionize the FinTech industry, especially in sectors such as banking, payments, and investments, among others. Integrating AI into FinTech can greatly increase efficiency and productivity by using automation to deal with various repetitive processes. AI and machine learning are also capable of using algorithms to analyze and interpret data to help investors make more informed decisions. An estimated sum exceeding $4.6 trillion has been invested in digital AI tools like these, with platforms like Trade Ideas, TrendSpider, and Black Box Stocks gaining considerable traction.

Threats

It's no doubt that the FinTech industry struggled throughout 2022, and that was partly because of a large reduction of global funding into the space. In 2022, global FinTech funding amounted to over $75 billion, which is down 46% from 2021. When recessionary and inflationary fears hit its peak in the second half of 2022, global FinTech funding took a hit as well. The space only received slightly above $10 billion in funding in the 4th quarter of 2022. Even in 2023, Q1 funding was down 83% from last year, with the overall funding amount down to $2 billion. At this rate, the FinTech industry may see another year of contracted investment funding, significantly upending the industry's growth and innovation in the near term.

Conclusion

My ultimate rating for FINX is Sell. The long-term outlook appears favorable, and it seems the sector hit a funding trough in 2022. With signs of an economic and tech recovery emerging, I do not foresee FinTech funding to drop further. I am optimistic for the FinTech industry as a whole, but this ETF has inherent flaws that make it too unattractive for me. The fund has an extremely low dividend yield, and I have never seen a fund with such a low dividend growth rate as FINX. Ultimately, there are several much better alternatives than FINX. For example, KOIN is a much better alternative in my opinion. The fund has a whopping 20% dividend yield, and it performs comparably to FINX.

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