Disruptive Theme of the Week: Emerging Markets Fintech

Fintech offers substantial growth opportunities in emerging markets by facilitating financial inclusion for vast unbanked populations, exemplified by India's digital identity program. While major fintech ETFs like ARKF are predominantly U.S.-centric, investors seeking exposure to this EM potential can consider broader emerging market funds such as the iShares MSCI Brazil Small Cap ETF (EWZS), iShares MSCI Emerging Markets ETF (EEM), or the Freedom 100 Emerging Markets ETF (FRDM), which hold significant financial sector weightings and have demonstrated strong year-to-date performance, highlighting fintech's transformational investment theme in these regions.

Analysis

Fintech in emerging markets presents a significant structural growth opportunity, driven by a large, youthful, and underserved demographic, with 85% of the global population residing in these regions and 90% of them being under 30. India's successful implementation of a digital identity program, which expanded financial inclusion from one-fifth to 85% of its population in a decade, serves as a powerful case study for the sector's potential. However, investors seeking exposure face a geographical mismatch with mainstream fintech ETFs. For example, the ARK Fintech Innovation ETF (ARKF), despite its $1.2 billion in assets and a 38.27% year-to-date return, is heavily weighted towards U.S. companies. To capture the EM fintech theme, investors can look to alternative ETFs that offer indirect exposure. The iShares MSCI Brazil Small-Cap ETF (EWZS) has delivered a 38.5% YTD return, with a 17.7% allocation to financials including local fintechs. Alternatively, the Freedom 100 Emerging Markets ETF (FRDM) provides broad exposure with a 28% weight to financials, has outperformed benchmarks with a 25.7% gain, and notably excludes China, offering a distinct risk profile compared to broad indices like the iShares MSCI Emerging Markets ETF (EEM).

Key Decisions for Investors

• Investors seeking exposure to the high-growth emerging markets fintech theme should look beyond dedicated U.S.-centric ETFs like ARKF and instead consider funds with significant financial sector weightings in those specific regions.
• For targeted exposure, the iShares MSCI Brazil Small Cap ETF (EWZS) offers a direct play on a key Latin American market, while the Freedom 100 Emerging Markets ETF (FRDM) provides a broader, ex-China approach that has demonstrated significant outperformance.
• Given the strong recent performance in ETFs like BPAY (+38.1% in three months) and FINX (+28% in three months), it is prudent to assess valuation and entry points, as the long-term structural trend may be accompanied by near-term volatility.
• Portfolio construction should account for the strategic implications of China's exclusion from an ETF like FRDM, which has been a key driver of its relative performance against cap-weighted emerging market benchmarks.