Recent headlines about Bank of America (BAC) customers and their Zelle woes got me thinking about the state of financial technology in America. For anyone not familiar with Zelle, my Gen-X jaded take on it is that it is yet another bunch of tape and string layered over ancient existing banking infrastructure.
While Europe has IBAN, Canada has Interac, and much of sub-Saharan Africa has been financing startups on flip phones for well over a decade, we are stuck with daily and monthly transfer limitations, fees for electronically transferring money in less than three days, and general frustration in the banking industry's death grip on our deposits. Believe it or not, I have found that the fastest, cheapest way to transfer money from one financial institution to another is to write myself a physical check from the first bank and deposit it in the other using my mobile phone app.
I figured in this article I would take a look at the state of some financial services and fintech exchange-traded funds.
As you can see in the table below, 2022 was not kind to fintech. The fourth-quarter into the first half of January saw this sector participate in a bit of a surge though, so let's take a look at what drove some of these returns.
Source: Factset, All You Can ETF
I pulled down holdings for the funds (except Financial Select Sector SPDR Fund (XLF) and ran some attribution from September through Wednesday. From the returns chart below, it's clear that while these funds seem to cover the same space, each fund is doing something different. The Correlation table below the graph is there for further proof.
Source: Factset, All You Can ETF
3Source: Factset, All You Can ETF
Overall, these funds generally stayed away from crypto and digital assets, although Ark Fintech Innovation ETF (ARKF) has a position in Coinbase, which was down about 22% in the observed period.
Overlap among the four funds was fairly light. From IPAY's perspective, it shares three holdings with ARKF, nine with Amplify Emerging Markets FinTech ETF (EMFQ) , and 21 with FINX for 6%, 17%, and 40% overlap, respectively.
FINX and ARKF did not participate in the comeback rally, but for different reasons. ARKF is still looking at names that may have good prospects, but, from my perspective, have little to do with fintech, like Roku Inc (ROKU) , Nvidia Corp. (NVDA) , Zillow Group (Z) , and JD.com (JD) . FINX suffered from the exposure to digital assets mentioned above.
When I look at all of these funds, what worked was any exposure to companies and technologies that are already in use and have wide adoption in the market. Case in point is the top contributors to return for ETFMG Prime Mobile Payments ETF (IPAY) , which include Mastercard Inc. (MA) , Visa (V) , Block (SQ) , Adyen NV (local ticker ADYEN-NL), and Kakaopay Corp (local ticker 377300-KR), which combined to contribute to just under 50% of IPAY's returns between Sept. 30, 2022, and Wednesday. Similarly, EMFQ had established overseas payment facilitating names that were the Top 5 contributors to results that posted anywhere from 40% to 71% returns for the observed period.
Wrap it Up
As we move through this part of the economic cycle, funds like IPAY and EMFQ make more sense to me than ARKF and FINX, if only because the companies in these two funds are the ones that are established, have scale, and are making money being the plumbing behind both consumer and commercial spending. IPAY for established U.S. exposure and EMFG for the growth potential in the rest of the world.