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Pandemic Made This Fintech ETF Fabulous. The Phenomenon Will Continue.

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Pandemic Made This Fintech ETF Fabulous. The Phenomenon Will Continue.

The coronavirus pandemic is spurring adoption of an array of disruptive technologies that were, well, already disrupting prior to COVID-19 becoming part of our daily lives.

What Happened: Count fintech as one theme that was already on an impressive upward trajectory that's getting an assist from changing habits due to the virus. That partially explains the success of the ARK Fintech Innovation ETF (NYSE: ARKF) this year.

ARKF is something of a hidden gem among ARK Investment Management's stable of actively managed funds because it's not one of the firm's three ETFs with big Tesla (NASDAQ: TSLA) exposure nor is it involved in the sexy genomics space.

Why It's Important: Home to the likes of Square (NYSE: SQ) and PayPal (NASDAQ: PYPL) – ARKF is the ETF with the largest allocation to the former – the ARK fund is uniquely positioned to capitalize on the move to cashless/contactless payments pushed by COVID-19.

“We see PayPal as the best positioned in the very near term, given its focus on e-commerce, but we believe it will ultimately give back a portion of recent growth,” according to Morningstar. “We think the market is overly focused on this near-term tailwind and competition for online payments will heat up over time.”

PayPal is the sixth-largest ARKF component at a weight of 3.75% as of Dec. 21. While PayPal may face online payments competition, it enjoys superior brand enthusiasm and its move into the cryptocurrency universe is a long-term catalyst.

“Numerous payments industry participants have said that they have seen the shift away from cash accelerate through the coronavirus pandemic, as handling cash is viewed as a potential way to spread the disease,” notes Morningstar. “The shift away from cash was an existing trend, but if this persists it could pull forward this trend and benefit the payments industry as a whole by increasing the volume running through electronic payment systems.”

What's Next: ARKF clearly benefits from its nearly 11% weight to Square, a stock that's up more than 273% year-to-date, a rally that refutes the oft-cited thesis that shares are vulnerable to weakness in small- and mid-sized businesses.

Square is levered to the cashless payments theme, but offers more as digital wallets remain grossly undervalued relative to traditional bank accounts and as the company encroaches upon frontiers, including lending and payroll, typically dominated by old guard financial services firms.

Disclosure: The author holds a position in Square.

 

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