A look inside a 6yr old Fintech Index

Fintech has changed the business culture of the investment sector mostly by `forcing` incumbents to adapt to the Fintech competition and in many cases leapfrog the innovations. Robo-advisory is the best example of this reality.

Back in 2016 when Betterment`s CEO was its founder Jonathan Stein [1] and Wealthfront was shifting CEOs (co-founder Andy Rachleff, Adam Nash 1/2014–10/2016), KBW launched a US Fintech Index. I remember dedicating a post on Daily Fintech to the launch of the KBW index because it was early days and there were very few Fintechs that were publicly traded at the time.

KBW is an investment bank — Keefe, Bruyette, and Woods (KBW) — which specializes in the banking sector and has several indices (in collaboration with NASDAQ) in the financial sector. The KFTX (no relationship with FTX or Ka-ching FTX) index is US focused and includes publicly traded Technology companies that deliver financial products and services. These companies are nearly exclusively electronic, with limited to no “bricks and mortar,” and their revenue mix is predominantly fee-based (not using their balance sheet).

At launch, the index included companies like Thomson Reuters, Fidelity, Fiserv, ICE as their top holdings and half a dozen small caps below $2 billion market capitalization, like Envestnet, BlackHawk Network Tech, Evertec. The index is market-weighted and rebalanced on a quarterly basis. As a piece of Fintech history, Motif immediately created a thematic wrapper to mirror 100% the index and of course, the Motif community could customize this Motif according to their needs.

Invesco launched an ETF tracking the KFTX index 9 months later (3/2017) the $FTEK ETF.

Fast forward to today and the KFTX index still includes the top holdings from 2016 but the composition has changed considerably both because several Fintechs (whose revenues are not derived from their balance sheet) are publicly traded and several finserv tech companies have been acquired or taken private.

According to FT Partners, there have been 106 Fintech IPOs since 2017!

Source: FT Partners Q3 2022

Fintechs that were included from the start acquired other Fintechs also included in the index:

  • Fiserv acquired First Data in mid-2019 for $22 Billion. Source
  • In mid-2017, Vantiv (in the index) a U.S. credit card processing company founded in 1971 acquired Worldpay, the U.K.’s largest payment processing company, for £8 billion ($10.4 billion) and in mid-2019, the Vantiv Worldpay entity was acquired by FIS. Sources [2]
  • One of the 2020 mega deals was the acquisition of IHS Markit by S&P Global for $44 Billion (all stock). Source
  • In May 2022, ICE acquired Black Knight, a mortgage-lending software and data analytics firm founded in 2008 and part of the Fidelity National Financial (FNF) company, for $13.1 Billion (cash & stock). Source

Some Fintechs that were included in the index were acquired by companies Not included in the index:

Several Fintechs included in the index were taken private:

The KFTX index is down c. 22% year on year, which is not that bad when we look at Paypal`s performance (-57%), Block (-71%), and FIS (-37%).

The performance of the constituents of the KFTX index varies considerably.

The younger Fintechs have clearly suffered the most (Affirm, Coinbase, Lemonade, etc.). On the other end of the spectrum (positive yoy returns) the companies are all incumbents.

$FICO has offered huge returns (66+% yoy) and Zacks Equity research continues to attribute a Momentum Style Score of B (outperform over the next month) and Zacks Rank of #2 (Buy) — What Makes Fair Isaac (FICO) a Strong Momentum Stock: Buy Now?

VISA and Mastercard, as if twins, have performed exactly the same (+8%). FIS and Fiserv performance are miles apart (-37+% vs. +4%). Even exchange businesses vary a lot; (Nasdaq & CBOE are close -4% to -5% but CME and ICE are -20% to -23%).

WEX a payments & mobility Fintech (I was not familiar with them before) has done extremely well. They help businesses with operational complexities like employee benefits, managing and mobilizing fleets, and streamlining payments. An incumbent that has transformed and become a global commerce platform helping businesses run their business (sounds like Stripe but different).

The top Fintech ETFs that roughly hold 70% of US Fintechs have dropped c. 70% yoy compared to the KFTX c. 22% yoy drop. ARKF includes Fintechs like Adyen, Shopify, Robinhood, Twilio, in their top holdings and is yoy down -66%. FINX ETF (Global X FinTech ETF) includes Adyen, Intuit but the rest of their top holdings are incumbents also included in the KFTX index with a yoy performance of -46%.

FTEK tracking KFTX — AUM $51M

FINX — AUM $440m

ARKF — AUM $730m

If you actually read to the end of the article, I strongly suggest you Listen now, Not Later to “Ka-Ching!” . A song by Canadian singer Shania Twain, released as the second international single from her 2002 album Up!.

Lyrically, the song is about money that can often sometimes be wasted on materialistic things.

Additional Sources : https://indexes.nasdaqomx.com/index/Weighting/KFTX

https://index.co/list/22259-nasdaq-fintech/companies

[1] Sarah Kirshbaum Levy, a former executive of Viacom CBS became the CEO in Dec 2020 https://www.thinkadvisor.com/2020/12/08/betterment-ceo-and-founder-jon-stein-resigns/

[2] Vantiv Merger with Worlspay https://www.cnbc.com/2017/08/09/vantiv-merges-with-worldpay-10-billion-deal.htmlFIS acquisition https://staxpayments.com/blog/vantiv-worldpay-by-fis/

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№1 #Finance Global Woman Influencer by Refinitiv 2020 & 2019. Top Global #Fintech Influencer, Futurist, #AI, #Blockchain +: 30yrs FINANCE — https://linktr.ee/Ef

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Efi Pylarinou

№1 #Finance Global Woman Influencer by Refinitiv 2020 & 2019. Top Global #Fintech Influencer, Futurist, #AI, #Blockchain +: 30yrs FINANCE — https://linktr.ee/Ef