FINX ETF is fairly valued but volatility is likely to remain elevated (NASDAQ:FINX)

Investment thesis

FinTech is a global theme, poised to benefit from growing broadband and mobile internet penetration coinciding with a rising middle class in developing markets, historically underserved by traditional financial services. While FinTech companies have historically catered to the digital preferences of young consumers, they are increasingly competing on cost and convenience in a range of more established industries like lending and insurance. In 2020, the number of active online banking users was approaching 1.9 billion worldwide. Forecasts suggest that this number could reach 2.5 billion by 2024, underscoring the vast reach of just one segment of this theme. In this article, I will review Global X FinTech Thematic ETF (NYSEARCA: FINX) which provides exposure to a basket of international FinTech stocks.

Policy Details

The Global X FinTech Thematic ETF tracks the performance of the Indxx Global Fintech Thematic Index. The index invests in companies at the forefront of the emerging fintech sector, which encompasses a range of innovations helping to transform established industries such as insurance, investing, fundraising and third-party lending through unique mobile and digital solutions.

If you want to know more about the strategy, please click here.

Composition of the portfolio

From the sector allocation table below, we can see that the index places a high weighting on the information technology sector (representing approximately 77.7% of the index), followed by financials ( representing approximately 14% of the ETF) and industries (representing 4.7% of the portfolio). The three main sectors have a combined allocation of around 96.4%. Not surprisingly, FINX is heavily concentrated in sectors related to the financial sector. I think it’s important to see how it aligns with your investment goals and whether you’re comfortable with higher exposure to tech and financial stocks.

The top 3 countries accounted for approximately 76% of the portfolio. The US has the largest allocation (~65% of the fund), followed by the Netherlands at ~7% and Australia at ~4%.

FINX invests over 36% of funds in large-cap growth companies, characterized as large companies where growth characteristics predominate. Large-cap issuers are generally defined as companies with a market capitalization exceeding $8 billion. The second largest allocation is to mid-cap growth issuers, representing around 17% of the portfolio. Interestingly, FINX allocates over 60% of funds to growth stocks which typically reinvest all free cash flow into growth opportunities. These companies tend to have a higher beta on average. Therefore, I think it is important to determine if you are comfortable with a higher level of volatility.

The fund is currently invested in 65 different stocks. The top ten holdings represent 52.01% of the portfolio, with no stock weighing more than 9%. Overall, I would say FINX is well diversified.

Since these are stocks, an important characteristic is the valuation of the portfolio. According to data from Global X ETFs, the fund is currently trading at an average price-to-book ratio of 3.72 and an average forward price-to-earnings ratio of around 22.5. In addition, the portfolio shows a return on equity of 15.4%. While I don’t consider the current valuation to be cheap, I think it’s pretty obvious that FINX is now much cheaper than it was 4 months ago. In my opinion, this eliminates a lot of valuation risk. Additionally, these companies are capable of generating a very good return on equity and have strong growth opportunities, so it is fair to assume that their valuation should impose a premium. Overall, I think FINX is quite popular at the moment. However, it is impossible to predict whether or not the decline in technology stocks will continue over the next month, which adds a lot of uncertainty to the bullish thesis.

Is this ETF right for me?

Below I compared the price performance of FINX against the performance of the Invesco QQQ ETF (NYSEARCA:QQQ) over 5 years to determine which was the better investment. During this period, FINX underperformed QQQ but outperformed the S&P 500. Compared to FINX, QQQ rose more than 64 percentage points. To put FINX performance into perspective, a $100 investment in FINX five years ago would now be worth $205.49 after accounting for the recent sell off. This represents a compound annual growth rate of over 15%, which is a very good absolute return.

However, this chart clearly shows how volatile this strategy can be. In all major pullbacks in the past five years, FINX has had a higher pullback than QQQ, which definitely makes it much more volatile. If you plan to buy this ETF for a long time without selling anything in the meantime, I think you will get a good result. However, in the short term, I don’t think FINX is suitable for an investor, but more for a trader looking to profit from the volatility of FINX.

Key points to remember

Fintech is an exciting industry because the returns are high and the future prospects are attractive. That said, I think it’s hard to pick tomorrow’s winners because the industry is driven by continuous innovation. This is certainly a factor that could explain why this strategy is so volatile. For the above reasons, I don’t think FINX is suitable for investors with a low tolerance for risk. However, if you have the courage to withstand sharp declines and approach this investment from a long-term perspective, I believe FINX could ultimately offer a fair return at the current valuation.