“These innovations should revolutionize the financial industry, impacting every sector of the global economy,” says ARKF’s fund literature.
In an interview a few months back, ARK client portfolio manager Renato Leggi pointed to fossil fuel-based energy, big pharma and banks as industries that could be disrupted by technology. For banks, that means fintech.
Both the ARK and Global X fintech funds count payment company Square Inc. as their top holding, and other repeat holdings among the funds’ respective top 10 positions include Dutch payment company Adyen NV and PayPal Holdings Inc.
FINX contains 33 stocks versus 49 for ARKF, but there are only seven overlapping holdings between them, according to ETF Research Center. That should provide a dose of differentiation between them, as should their different methodologies—to repeat, FINX is passive and ARKF is passive.
ARKF, the more expensive of the two with an expense ratio of 0.75%, had gained 96.5% year to date (as of December 9) while FINX rose 42.9%.
Is It A Tech Or Finance Play?
Morningstar fits both ETFs into its U.S. technology total return category. So is the fintech category a play on technology or financial services?
If it’s the former, an apt comparison could be the technology bellwether fund Invesco QQQ Trust (QQQ), which charges an expense ratio of 0.20% and has a year-to-date return of 42.5%.
When looking at it from a financial services perspective, both FINX and ARKF have smoked the two largest broad-based financial sector ETFs. The Financial Select Sector SPDR ETF (XLF), with fees of 0.13%, is down 3% this year, while the Vanguard Financials ETF (VFH), which charges 0.10%, is down 4.8%.
On a three-year annualized basis, FINX’s 26.3% return is slightly better than QQQ’s 25.9% return, and miles ahead of the low-single-digit returns from XLF and VFH.
But do such comparisons even matter? Palandrani posited that thematic investing, including fintech, transcends traditional classifications like the 11 economic sectors within the S&P 500.
“Many of these themes are actually disrupting these traditional sectors,” he said. “Fintech is mostly classified as information technology companies that apply disruptive technologies that are identified to financial services and banking.
“But for us, that doesn’t necessarily mean that fintech should be considered an exposure or allocation to the information technology portion of an investor portfolio,” he added. “We think investors should look at fintech from the lens of disruption, and if they have an allocation toward financial services, we believe that in order to capture the future of the financial services sector they should have exposure to fintech-related companies.”
But getting back to the FINX versus ARKF comparison, does the latter’s significant outperformance during the past year indicate that active management is the way to go with fintech funds?
Naturally, Palandrani begs to differ. He views both passive and active as complementary strategies in the fintech space.
“For investors, it’s important to get exposure to a passive strategy because we may not know who the ultimate winners will be—in any emerging technology there will be winners and losers,” he said. “So a passive strategy could be the best vehicle to get exposure to a theme where you’re getting the winners, and the losers could become a smaller portion of your portfolio.”