The stock market has performed very well over the past year. Although it hasn't been without its volatile times, specifically around the president's reciprocal tariff announcements in April, the S&P 500 is up by more than 20% in a year.
There are certain areas of the stock market that have led the move higher. Megacap technology stocks are one big example, fueled by the artificial intelligence (AI) boom.
However, another massive winner after several years of underperformance is financial technology, or fintech. Thanks to a combination of factors (more on those in a bit), some of the fintech companies that were the most beaten down and forgotten about after the pandemic-era fintech surge have been among the stock market's best performers.
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One fintech investment that has performed especially well has been the Ark Fintech Innovation ETF (ARKF 0.40%), which has more than doubled investors' money over the past year alone.
Why have fintech stocks performed so well?
As mentioned, the Ark Fintech Innovation ETF has more than doubled over the past year, and in addition to company-specific strong performance related to certain fund holdings, which I'll get to in a bit, there are some general catalysts that are responsible for the performance.
- First, there have been general market tailwinds. Over the past year, the S&P 500 has delivered an excellent 22% total return, and this certainly hasn't hurt fintech performance.
- The regulatory environment has become much more friendly, especially when it comes to the cryptocurrency side of the fintech industry. For example, there is now regulatory clarity that banks can serve as cryptocurrency custodians.
- The consumer has remained stronger than expected. Loan defaults haven't really ticked higher, and consumer spending has been strong, even in the face of tariffs and other economic uncertainty.
- The anticipation of lower interest rates is also likely serving as a catalyst. Lower rates could boost consumer spending, lower deposit costs for banks, and lead to more lending activity.
- The AI investment boom hasn't just been a tailwind for megacap technology stocks. Many fintech companies are major beneficiaries of improvements in AI technology, including some of the Ark Fintech Innovation ETF's top holdings.
Also, there have been some company-specific tailwinds. Keep in mind that the Ark Fintech Innovation ETF is not an index fund. It is an actively managed fund whose managers (led by Cathie Wood) hand-pick stocks that they think will deliver outsize returns. And to put it mildly, the portfolio's larger holdings have done extremely well over the past year.
The fund's top holding, Shopify, has done a great job of focusing on efficiency and building out its core e-commerce ecosystem. Second-largest holding Robinhood Markets has been firing on all cylinders and is up by more than 500% over the past year on a surge in trading activity as well as the renewed interest in crypto. Other top holdings like Roblox and SoFi Technologies have also performed exceptionally well over the past year.
Is it still a good time to invest in fintech?
To be sure, the Ark Fintech Innovation ETF doesn't look quite as attractive as it did a year ago, but that doesn't mean it's too expensive. There are yer to be any actual interest rate cuts, and if some of the portfolio companies continue to post impressive growth quarter after quarter, they could continue producing market-beating returns.
Plus, because the ETF is an actively managed fund, Wood isn't committed to holding any particular stocks for any length of time and has the flexibility to be opportunistic. For example, she has already made recent IPO Circle one of the fund's top holdings. Wood and her team are constantly buying and selling stocks, aiming to set investors up for success, so just because the fund's existing holdings have performed well over the past year doesn't mean the Ark Fintech Innovation ETF can't continue to outperform.
