Financial technology (fintech), broadly speaking, allows the remote delivery of financial services to businesses and individuals through computers or mobile devices. Fintech encompasses everything from smartphone apps to complex blockchain-enabled networks that facilitate financial transactions.
In emerging markets, the development level of fintech is quite rudimentary, but holds massive potential. In countries where there are “more smartphones than bank accounts,” access to financial services for unbanked populations is critical to reduce poverty, provide “financial inclusion,” and stimulate economic growth.
According to the World Bank, 85% of the global population resides in emerging markets and roughly 90% of them have yet to turn 30. The youth and underserved nature of those markets means that they are ripe for widespread increased adoption of online transactions, and fintech has the potential to meet that demand.
Financial Technology plays an increasingly important role in expanding financial inclusion for people in emerging economies, helping reduce service costs and making it possible to reach more of the population. India can serve as a case study for this trend.
Within the span of a 20-year period, the country constructed and adopted the most extensive digital biometric identity program in the world. The system relies on photographs, fingerprints and iris scans. The establishment of this program by the government has made it possible for 85% of its population to access financial inclusion, a staggering increase from a mere one-fifth of the population 10 years ago.¹
ETFs to Get Fintech Exposure
There are several ETFs that specifically target fintech. The largest ETF in the category is the actively managed ARK Fintech Innovation ETF (ARKF ) which holds over $1.2 billion in assets and is up an impressive 38.27% YTD. Looking at the ETF’s top 10 holdings, however, they are very U.S.-focused. Top names include Robinhood, Shopify (technically Canadian), Coinbase, and Circle. Ultimately, ARKF has very little emerging market fintech exposure.
Other ETFs in the fintech space include the iShares FinTech Active ETF (BPAY ) and the Global X FinTech ETF (FINX ). BPAY has strong YTD performance, up 23.8% a little past the halfway mark. However, it’s up 38.1% over the last three months. This might explain its assets under management of only $10.5 million.
FINX on the other hand has assets of $314 million, despite its performance this year lagging its peers. It is up only 11.3% YTD, although it too has had a nice recent runup, with an increase of 28% over the last three months. But once again, neither BPAY nor FINX have much in the way of emerging market fintech exposure.
ETFs to Get Stealth EM Fintech Exposure
Scouring the ETF ecosystem for ETFs that offer investors EM fintech exposure, there are a few interesting plays. One suggestion is the iShares MSCI Brazil Small Cap ETF (EWZS ) with $185 million in assets under management. It has delivered a 38.5% YTD return. The ETF has a 17.7% weight to financials, including Brazilian fintechs StoneCo and PagSeguro.
Another option is to just hold an emerging markets ETF like the iShares MSCI Emerging Markets ETF (EEM ). It has an almost 25% weight to financials and has delivered a 16% return this year.
If you are trying to align your EM fintech exposure goals with democracy as a path to financial inclusion, the Freedom 100 Emerging Markets ETF (FRDM ) is another interesting way to play this theme. It has a 28% weight to financials and a large exposure (27%) to Latin America. The fund’s approach — weighting countries by their freedom score — has significantly outperformed cap-weighted emerging market benchmarks this year, with a gain of 25.7%. FRDM has grown to over $1.2 billion in assets. Notably, emerging markets behemoth China has no presence in the ETF, due to its low freedom score.
Fintech — especially in relation to other themes like neobanks, blockchain, and digital assets — has been a top investment theme this year. Many blockchain-themed ETFs like the Amplify Transformational Data Sharing ETF (BLOK ) hold top fintech names. BLOK is up 35.6% this year and is now over $1.1 billion in assets under management. Fintech’s “transformational” capability in emerging markets offers ETF investors interesting potential for growth.
VettaFi LLC (“VettaFi”) is the index provider for BLOK, for which it receives an index licensing fee. However, BLOK is not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of BLOK.
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¹ https://www.hks.harvard.edu/centers/mrcbg/programs/growthpolicy/how-india-leapfrogged-financial-inclusion
