Source has launched the Source KBW NASDAQ Fintech UCITS ETF (LON: FTEK) – Europe’s first ETF focused solely on the fast-growing financial technology (“fintech”) sector – on the London Stock Exchange.
The Source KBW NASDAQ Fintech UCITS ETF tracks the equal-weight performance of 50 companies listed in the US who operate in the fast growing fintech sector.
The US dollar-denominated fund tracks the KBW NASDAQ Financial Technology Index, which captures the performance of fintech companies listed in the US. Fintech companies are defined as those that use technology to deliver financial products and services, such as payments, financial data, exchanges, internet banks, speciality lenders and software.
The index identifies firms that tend to have distributions which are nearly exclusively electronic, as opposed to traditional “bricks and mortar,” and their revenue mixes are predominantly fee-based. They leverage new assets such as advanced data aggregation and analysis, innovative technology, and creative thinking.
Launched in August 2016, the index currently has 50 constituents, from household names such as Paypal and Visa to newer entrants like point-of-sale payment app Square. It tracks a range of market capitalizations, from under $1 billion to over $150bn.
Dr. Chris Mellor, Executive Director, Equity Product Management at Source, commented: “Fintech companies are reshaping every part of financial services, from consumer finance and payments to insurance and data processing.
“The growth of fintech accelerated after the financial crisis, when traditional financial services were under extreme pressure just as consumer behaviour was changing and technologies such as smartphones, cloud computing and big data were taking off.
“Faster, more efficient and more joined-up technology in the financial arena has driven stellar growth for fintech companies and this trend shows no sign of slowing.”
The index constituents are weighted equally to ensure performance comes from across the sector and is not dominated by the largest players. By equally weighting constituents, the index aims to outperform a market cap-weighted equivalent by increasing exposure to the risk premium associated with smaller cap stocks.
The largest index sub-sector exposures, as of 28 February 2017, are payments (26.2%), processors/business information (26.1%), financial data (21.6%), exchanges/automatic trading (11.9%) and networks (6.1%).
Using back-tested data the index returned 13.1%, 11.5% and 10.7% in 2016, 2015 and 2014 respectively, with volatility of 16.8%, 16.4% and 14.9%.
Source expects to see significant demand for the new ETF to be driven by institutional investors – in a survey of 71 institutional investors conducted in February 2017, nearly half (46%) said they anticipate 2017 being a record year for investment in the fintech sector, but the same percentage said a lack of investment vehicles is a hindrance to getting more exposure to it.
The financial services sector identified most often as being at risk from fintech disruptors was consumer banking (59%), followed by payments (43%), financial advice (30%), foreign exchange (30%), asset management (27%), wealth management (20%) and life insurance (20%).
The ETF has a total expense ratio (TER) of 0.59%, comprised of a 0.49% management fee and a 0.10% swap fee.
Although the fund has been initially listed on the London Stock Exchange, it may be rolled out on exchanges across Europe – including the Deutsche Borse, Borsa Italiana and SIX Swiss Exchange – in coming months.
The ETF is the first in Europe to track the fintech space; however, there are currently a few ETFs available in the US which follow this market. These include the Global X FinTech Thematic ETF (Nasdaq: FINX), which tracks the Indxx Global FinTech Thematic Index and has a TER of 0.68%; and the PureFunds Solactive FinTech ETF (Nasdaq: FINQ), which tracks the Solactive FinTech Index and also has a TER of 0.68%.