Is 2017 the year of the fintech ETF?
Both the US and the EU have launched exchange-traded funds (ETFs) dedicated to tracking the fintech industry across the globe.
This proves that fintech is finally being recognised for becoming a promising and competitive sector, with great potential for growth. This is a significant step forward for the industry, as it allows for trading and increased investment opportunities for all the companies involved.
Exchanged-traded funds (ETFs)
The first ETF was set up in 1993. Since then, they have grown in popularity and gathered assets at a rapid pace.
An ETF is similar to a mutual fund, but can be traded like stocks. This characteristic is the key reason ETFs are popular with professional investors and individual active traders.
Unlike mutual funds, ETFs can be traded intraday, allowing speculative stakeholders to bet on the direction of shorter term market movements through trading of a single security (e.g. the fintech sector).
ETFs are worthwhile investments for three reasons:
- They cost less than mutual funds.
- They diversify portfolios.
- They are tax efficient.
By creating an ETF for a specific market, like fintech, it allows many more opportunities for investment in that sector.
Why are Europe and the US investing in fintech ETFs?
The US already has several fintech ETFs, but Europe has only just launched the KBW NASDAQ Fintech UCITS ETF, which aims to track the KBW NASDAQ Financial Technology Index.
This will capture data from fintech companies publicly listed in the US. So far, there are 50 businesses involved, ranging from global brands such as PayPal and Visa to newer entrants like Square, the point of sale payment app.
The market capitalisations of these companies range from under $1 billion to over $150 billion. However, they are all weighted equally to ensure the performance is assessed across the sector, and not dominated by the larger players.
Fintech was once reserved for startups and venture capital. A recent survey of institutional investors stated that 46% claimed a lack of investment vehicles is a hindrance in getting more exposure to the market. Until the establishment of fintech ETFs, investors could not take advantage of the rapid growth of the sector as a whole, despite it outperforming the S&P 500 by 10% p.a. since 2008.
*Graph courtesy of Source
However, now investors have the opportunity to take part in this rapidly evolving sector and profit from its growth for years to come:
“Faster, more efficient and more joined-up technology in the financial arena has driven stellar growth for fintech companies and this trend has no sign of slowing” Dr Chris Mellor, Executive Director, Equity Product Management at Source
The investment into fintech will promote development and give new opportunities to companies within the index, as well as the sector as a whole.
It would not be surprising if other prominent fintech markets, such as India and Hong Kong, start employing this strategy as a way to generate investment in their local fintech industries. However, fintech in these areas relies mainly on private investment, so may not be considered a priority.
This is undoubtedly the next stage in fintech’s growth in the West, so while 2017 may not be the year of the fintech ETF around the globe, it is the start of a new direction for certain markets.