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.


Related Insights

Market Outlook with Ed Yardeni | October 17, 2022

Is the Future of Banking “Open”? | March 26, 2021

Market Data M&A Accelerates Pivot to a Digital Future | February 10, 2021

Four Themes Driving Innovation in Global Financials | January 25, 2021

Hamilton Financials Innovation ETF: Invest in Digital Leaders Reshaping the Financial Sector | November 19, 2021

Fintech/Cdn Banks: Can Standalone Digital Banks Disrupt the Incumbents? | January 14, 2021

Global Financials: The Most Attractive/Important Investment Themes in 2021 | November 16, 2020

Hamilton ETFs Launches Hamilton Financials Innovation ETF | June 1, 2020

Global Exchanges, E-Brokers and Fintech: Secular and Structural Growth Drivers Abound | June 15, 2019


A word on trading liquidity for ETFs …

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.

How does that work? When ETF investors are buying (or selling) in the market, they may transact with another ETF investor or a market maker for the ETF. At all times, even if daily volume appears low, there is a market maker – typically a large bank-owned investment dealer – willing to fill the other side of the ETF order (at the bid/ask spread).

Commissions, management fees and expenses all may be associated with an investment in the ETFs. The relevant prospectus contains important detailed information about each ETF. Please read the relevant prospectus before investing. The ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

Certain statements contained in this insight constitute forward-looking information within the meaning of Canadian securities laws. Forward-looking information may relate to a future outlook and anticipated distributions, events or results and may include statements regarding future financial performance. In some cases, forward-looking information can be identified by terms such as “may”, “will”, “should”, “expect”, “anticipate”, “believe”, “intend” or other similar expressions concerning matters that are not historical facts. Actual results may vary from such forward-looking information. Hamilton ETFs undertakes no obligation to update publicly or otherwise revise any forward-looking statement whether as a result of new information, future events or other such factors which affect this information, except as required by law.

[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.

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