Todd Rosenbluth, head of ETF and mutual fund research at CFRA, is a fan of thematic ETFs, but has reservations about FINX and how well it truly represents the finance sector. “It is mostly IT services and software companies with a small stake in financial industries, such as consumer finance,” Rosenbluth said.
He also argues that this ETF shouldn’t be used as an alternative to staying in the mega-cap tech stocks that have dominated the market — that would mean investors miss out on the market’s best stocks. “We think thematic ETFs can complement diversified market-cap-weighted ETFs or even sector-focused ETFs, as they tend to have limited overlap. But if you only owned one of these loosely defined tech ETFs, you would miss out on Facebook, Apple, Microsoft and many of the top-performing stocks in the sector.”
Jacobs said investors who are embracing thematic funds typically carve out 10 percent to 15 percent of a portfolio split across multiple thematic ETFs. This approach works especially well for growth-oriented portfolios in which 80 percent or more of assets are already in equities.
Neena Mishra, director of ETF research at Zacks Investment Research, is more positive on FINX than Rosenbluth because she said companies like Wirecard, Square and PayPal do not get significant representation in broader tech or financial ETFs.
The Nasdaq 100 ETF, the Invesco QQQ (QQQ), holds three FINX top stocks — PayPal, Fiserv and Intuit — but at a total of 2 percent of the QQQ’s overall weighting. The Technology Select Sector SPDR (XLK) has just about 1.4 percent exposure to PayPal and does not own Square.
Wirecard, the top holding is FINX, is a European company, and Mishra pointed to the ETF’s 30 percent exposure to foreign fintech companies that do not find a place in most other ETFs as an investing feature that offers opportunity not typically available in core tech funds focused on U.S. stock benchmarks.
As investors reconsider how to invest in tech after the $120 billion one-day loss in Facebook shares, maybe the best reason to think twice before investing in this way is to consider one of the first thematic ETFs Global X ever launched: The Global X Social Media ETF (SOCL). SOCL is down 6 percent this quarter, and the big losses in Facebook and its peers leave the ETF with a 1 percent return over the past year, but in the past five years SOCL is up near-90 percent.
“The narrower the portfolio is focused, the greater the risk and reward,” Rosenbluth said.
“These are designed to be long-term trends,” Jacobs said. “The entire market, to some extent all money in circulation, whether invested or being spent, is ripe for disruption, and businesses that support it,” Jacobs said. “You can see quick movements in them, but ideally the investor is parking the money and staying in the portfolio for the long term, 10 to 15 years. You have to be someone with a longer time horizon than weekly or monthly risk.”