With its focus on blue-chip firms, the Hamilton Financials Innovation ETF (HFT) outperformed all fintech ETFs in the last two years, including those offered by “high profile” U.S. providers/managers. When it was launched, we explained that HFT would differentiate itself versus its competitors by focusing on “blue-chip” firms focused on financial innovation with higher growth, which were (i) profitable, (ii) had established business models, and importantly (iii) traded at reasonable valuations.
Since HFT was launched, it has been a tough market, but to be clear: we believe financial innovation remains a highly attractive theme and long-term financials investors should have exposure. That said, since its inception, HFT has had an annualized return of negative 3.6%[1]. While it is obviously disappointing to have a negative return, HFT was launched shortly before the tech-focused names fell out of favour. This modest negative return stands in stark contrast to the three major fintech ETFs, each of which had returns of negative 15% or worse over the same period[2]. Indeed, ARKF posted an annualized return of negative 24%! And it was not just ARKF – we would note HFT is ~10% ahead of the next best performing fintech ETF and at least 30% of all other competitors since its launch.
Notwithstanding the challenging markets, we believe Canadian investors should have a 5% weighting to ‘blue-chip’ financial innovation. The category has attractive growth prospects (secular EPS growth over 25%), high ROEs, and provides valuable diversification to core Canadian financial holdings (especially banks).
At year-end, the Hamilton Financials Innovations ETF (HFT) held 38 positions with forecast consensus portfolio-weighted EPS growth of ~26% for the next two years (combined) with a price-to-earnings valuation of 21.1x. HFT primary exposure is to the following three key categories: (i) digital payments (37% of NAV), (ii) market data and technology (~35%), and (iii) other fintech innovators, including wealth managers (~28%). The portfolio is skewed to large-cap global financials, with an emphasis on U.S. equities.
We believe HFT is well positioned to benefit from an economic recovery as well as ongoing secular trends towards increased utilization of data and technology and more capital-light models within the financial sector. Investors focused solely on legacy financials run a risk of missing this evolution. In our view, HFT offers an attractive balance between growth, volatility, and valuation with limited exposure to the most important risks dominating most financial services investors’ portfolios – namely credit risk, interest rate risk, trading and insurance underwriting – which can be particularly volatile during periods of heightened macro uncertainty.
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Hamilton ETFs are highly liquid ETFs that can be purchased and sold easily. ETFs are as liquid as their underlying holdings and the underlying holdings trade millions of shares each day.
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[1] Performance since inception is measured from HFT’s launch on June 1, 2020 to December 30, 2022.
[2] The fintech ETFs are ARKF, FINX, EAFT.