FINX: Fintech ETF Down, But Far from Out (NASDAQ:FINX)

The $285M Global X FinTech ETF (NASDAQ:FINX) is one of the more unique ETFs I track. And while I’m not too keen on anything in the stock market right now, it’s on my watch list and I I think he will have his time. As such, I’m covering it here by entering it with a hold rating.

But I will note that, as with many ETFs in a stretched stock market, this is one that has the makings of a high return/moderate risk tradeoff once the market “frees up” a bit. In other words, when stocks can be bought and held rather than traded. I think that’s the situation that investors are facing right now.

FINX invests in “fintech” stocks. This is a mix of firms in businesses related to mobile payments, lending (both peer-to-peer and larger market), financial software, information technology and other areas. Fintech notwithstanding as the name might imply, it is not just a growth capital segment. It also includes stocks of value.

Fintech: the future is now

Digital adoption is no longer a question, it’s a reality: around 73% of the world’s interactions with banks now take place through digital channels, and it’s necessary for businesses to compete and grow. Greater efficiency, productivity and financial performance, along with reduced costs are many of the potential benefits.

Embedded finance is the integration of a financial service into a non-financial business to manage monetary operations. Most modern businesses that sell products or services now use embedded finance to streamline the customer experience. The market is expected to grow at an astounding CAGR of 32.4% during the forecast period 2024-2032.

The importance of fintech as the world rapidly becomes dependent on technology and innovation is a given. FINX owns the world leaders in those new elements of the digital economy. As the world progresses towards e-commerce, paperless lending and online payments, we believe FINX is poised to reap the benefits of a booming industry.

High growth potential

According to a May 2023 Boston Consulting Group report, global fintech revenues are expected to grow sixfold between 2021 and 2030 to around $1.5 trillion.

Of course, there are risks. As digital activity grows, concerns about cybersecurity and money laundering grow equally. FINX could be greatly affected by wrongful data breaches or emerging regulatory issues.

Holding analysis

Here are the top 10 names of FINX. As is typical of the ETFs I prefer in my coverage, it is concentrated. The top 10 stocks account for more than 50% of assets.

Here’s a snapshot of the top 6 holdings, which collectively comprise more than 37% of the fund. My valuation concerns, expressed not only for FINX, but for the entire US stock market, are confirmed for me by the valuation ratings, which look like a report card built for a kid on his way to summer school.

Growth is mixed, and I’ll point out that stocks in FINX are a mix of primarily financial and technology names. As Alpha Quant Factor Grades Searches are relative to equity sector peers, I am not surprised to find a varied set of scores here. The tech companies in this portfolio can’t compare to mega-cap tech stocks in their past growth. Practically nothing can.

Profitability is by far the grade I focus on the most. And this is a solid set of businesses. So again, I’m sold on the quality of this portfolio, but not on the valuation and timing yet.

And a P/E ratio of over 30x as shown below only adds to the “weight of evidence” for me here. The sales price is also above what I’m comfortable with at 3.7x. But unlike highly cyclical companies that operate in more traditional technology and financial fields, the 15% expected earnings growth of fintech stocks seems realistic to me.

Technical Analysis of FINX

I present two diagrams here. First, note that as poorly as the average stock Invesco Russell 1000 Equal Weight ETF (EQAL) has done over the past three years (flat returns), FINX has fared much worse, losing half its value. This is all the more reason for me to look closely when adding it to my portfolio, as I believe some of the destruction experienced here will affect the entire stock market over time.

There are some companies in the portfolio that have performed extremely poorly, including some related to the cryptocurrency business. And, there are some larger holdings that have soared high on expectations and more recently crashed to the ground as reality set in.

A key part of my thesis is that FINX will be a dynamic part of my portfolio at some point, but my approach is never to force things. So this extended period of flat returns after the debacle of 2022 is an opportunity for this set of stocks and others entering the FINX portfolio to respond in the next phase of their growth cycle. But not yet.

Finally, this technical price chart (weekly prices) tells me that this market segment is biding its time. I will do the same. But whether it’s a new upcycle in the broader market, a recognition of growth potential here, or classic bottom-fishing investor behavior, I see FINX as a sleeping tiger, so to speak. However, for now, I will temper my enthusiasm with a hold rating until the price action more strongly indicates that the profit potential becomes more timely.