FINX - FINX: Volatility Risks Cloud Potential For E-Commerce Growth

Summary

• FINX invests in mid- to large-cap stocks centered on digital payments, lending, insuretech, and digital banking.
• The fintech industry may gain momentum from the rise of digital enhancements to traditional financial services like banking, lending, and insurance.
• FINX’s exposure to constant innovation and competition within fintech companies makes it very volatile and prone to large price fluctuations.

Global X FinTech Thematic ETF ( FINX ) is a potentially attractive option for its exposure to the fintech industry, which is continuously expanding and innovating. However, due to the high-risk nature of certain fintech models and strategies, I believe that FINX is too volatile for the current uncertain, highly-charged market environment, leading me to rate it a long-term Hold.

Investing in fintech may be especially challenging as its fast and continuous innovation makes it more difficult to knowledgeably allocate investments. Rapid innovation also generates substantial volatility that has resulted in immense drawdowns and lost profits for many. Furthermore, new-age fintech models like " buy now pay later " ((BNPL)) are prone to unhealthy levels of credit growth and higher consumer defaults. This may, in turn, create long-term financial hardship that could hurt the profits of companies held in FINX.

Despite its high risk and poor performance in recent years, FINX could still benefit from the expansion of broadband and mobile internet in the financial sector, especially within digital banking. The number of digital banking users is forecasted to reach $3.6B internationally by 2024, with roughly 94% of participants utilizing digital banking services at least once a month. FINX is also potentially well-positioned to benefit from expansion of digital financial services beyond just banking, such as insurance and third-party lending.

FINX may be a good option for those willing to face higher risk in exchange for potentially higher returns in the long term. This ETF is likely prone to significant drawdowns before signs of long term growth comes into sight, hence my Hold rating.

Strategy

FINX tracks the Indxx Global Fintech Thematic NR USD Index. This ETF tracks its respective index using the full replication technique. The full replication technique involves holding all the same securities that comprise the underlying index, also with the same weighting as that index. FINX invests in both value and growth stocks. FINX was launched and is currently managed by Global X Management Company LLC.

Holdings Analysis

FINX invests primarily in technology, industrials, and healthcare. Non-technology companies account for less than a quarter of total assets, making this ETF highly-concentrated in the technology sector. Fintech is a hybrid between finance and tech, however it is generally more focused on technology. Therefore, investors should be aware that despite having "FIN" in the name, FINX mostly just provides exposure to the technology sector while financial exposure is lesser and more indirect. Specific industries which FINX invests in include mobile payments, peer-to-peer (P2P) lending, alternative currencies, and financial analytics software.

FINX is decently top-heavy, with the top 10 holdings comprising 54% of assets, and the top 25 accounting for 83%, in a fund of 71 companies. This produces concentration risk and may deter those seeking greater diversification. However, FINX is not heavily-dependent on a single company, with no single holding comprising more than 8% of total assets. Roughly a quarter of its holdings reside in the United States, with no other country comprising more than 6% of geographical representation.

Strengths

FINX can potentially hedge against intense competition in the fintech space which may make it advantageous compared to investing in individual fintech stocks. Fierce competition in the fintech space creates an aura of uncertainty around which companies will profit in the long term and which ones will fall behind.

For example, PayPal ( PYPL ) was revolutionary during its inception in 1998 but is now being threatened by similar systems like Apple Pay and Shop Pay. Consequently, PayPal shares are trading roughly 75% lower than their peak. That was less than two years ago. For this reason, investors can buy fintech ETFs like FINX to concentrate risk and gain confidence that one fintech company falling behind competition won't diminish returns.

FINX is also decently liquid. This ETF has an average daily share volume of almost 150,000 shares, which equates to over $3mm.

Weaknesses

FINX exerts a very volatile strategy, which manifests in its standard deviation of 36 compared to 24 in the rest of the market and annualized volatility of 43% versus 22% in the rest of the market. In the chart below, FINX endures several price oscillations with the largest drawdown being over 60% despite outperforming the S&P from 2018-2022.

Though FINX has the propensity for long-term growth and outperformance of the market, it will also likely expose investors to immense price fluctuations and downturns during the process. FINX's low dividend yield of only 0.25% also confirms that this ETF is focused on capital appreciation, not an income payout.

Opportunities

The expansion of mobile and broadband components in financial services like insurance and lending could facilitate growth in the e-commerce industry, from which many companies held in FINX could benefit. The economic and social deterioration from COVID-19, especially during 2020-2021, catalyzed the popularity of remote services like online shopping and other digital payment mechanisms. The ecommerce industry continues to grow in 2023 , as it's expected to reach over $4B revenue by the end of the year and over $6B in 2027, with a CAGR of 12%. Revenue increases in the ecommerce industry could benefit many of the companies held in FINX.

FINX could potentially benefit from persistent inflation and the possibility of more interest rate hikes in the future, as it invests in lending services and insurance companies that could profit from such conditions. Commercial banks and other lending services may profit from increased interest income and higher demand for loans as consumers might need financing to attain goods that were affordable during pre-inflationary periods but no longer are. Alternatively, insurance companies may also profit from increased demand for insurance as the cost of potential damage or loss is now more crushing.

Threats

Though some fintech companies could benefit from prolonged interest rates, excessive economic downturn or a possible recession could jeopardize returns of these same companies. Fintech companies frequently rely on debt financing to power growth and expansion, meaning excessive interest rate hikes could result in higher borrowing costs for these companies. Borrowing costs becoming overbearing could increase the credit risk and reduce the profitability of many companies held in this ETF.

The Buy Now Pay Later model is somewhat revolutionary, but also quite risky for both firms and consumers. Popularization of this model may tempt consumers to load on more debt than they can afford, potentially leading to high interest charges, missed payments, and a poor credit score. For firms, having more clients cracking under debt pressure may increase delinquency rates and prompt tighter regulations, which together could hurt profits.

Conclusions

ETF Quality Opinion

FINX has a decently-diversified portfolio with many companies that could profit from innovations in the fintech space. Specifically, e-commerce developments in digital banking, third-party lending, and insurance could increase the returns of this ETF. However, I think the fierce competition and models like BNPL in the fintech industry generate uncertainty that many investors may not be comfortable with.

ETF Investment Opinion

I rate FINX a long-term Hold. I believe that this ETF could benefit in the next 5 years from digital financial services. This industry may profit from new client bases which previously had limited access to traditional, in-person services. However, FINX is probably not the ETF of choice for investors that are even remotely risk-averse. It is quite volatile and prone to sizable drawdowns. Therefore, those who invest for long-term growth may eventually reap its benefits, but the trip probably won't be smooth.

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