Invest in Mobile Payments, Just Don’t Invest via the New IPAY ETF

Investors looking for an easy way to play the “next big thing” were gifted the chance today with the launch of a new ETF, the PureFunds ISE Mobile Payments ETF (IPAY).

mobile payments

With PayPal’s (PYPL) split from eBay (EBAY) upon us and Apple’s (AAPL) Apple Pay gaining steam, mobile payments are the topic du jour.

And considering the market for mobile payments is expected to nearly triple in five years — from $50 billion last year to $142 billion by 2019 – it’s no surprise many investors are frothing at the mouth thinking about the investment potential.

Mega-trends like mobile payments tend to have many winners. So if you had the opportunity to invest in many mobile payments players at once via an ETF like via PureFunds’ new IPAY fund, that clearly would be a better alternative than betting on just one or two stocks, right?

Well … not so much.

What worries me immediately is a look at the fund’s holdings. IPAY’s top weights (of 30 total) go to Visa (V) at 6.45%, MasterCard (MA) at 6.24% and American Express (AXP) at 6.02%. Discover Financial (DFS) takes up another 5.43%.

So at least 24% of the fund is invested in traditional credit card companies, which just happen to have some kind of mobile payments footprint.

Yes, Visa, MasterCard, American Express and Discover are partners with many of the technologies in the mobile payments space.

But someone buying the new IPAY ETF as a way to play the next big thing in mobile payments would be sorely disappointed to learn that old-school credit card companies are the primary focus of their investment.

How “Pure” Do You Like Your Funds?

To be fair, this kind of overgeneralization isn’t a problem unique to the IPAY fund.

Case in point: The First Trust ISE Cloud Computing Index Fund (SKYY). If you wanted to invest in “cloud computing,” you’d probably think of companies like customer relationship management firm (CRM) or cloud business services provider Rackspace (RAX). That’s great – SKYY holds ‘em.

But SKYY also holds stocks like Amazon (AMZN).

Yes, Amazon Web Services is actually a big name in cloud computing, and it’s growing like a weed. But its $4.6 billion in first-quarter sales accounted for just 20% of overall Amazon revenue. The rest came from its retail and media businesses. So, AWS could succeed, but if Amazon’s retail sales suddenly fell off a cliff … well, your investment in the cloud, based on your belief in the growth of cloud services, could suffer for reasons that have nothing to do with the cloud.

Just look at the wording for SKYY’s objective/strategy, which includes “Technology Conglomerate Cloud Computing Companies” as well as “Non Pure Play Cloud Computing Companies” like Netflix (NFLX) that simply use the cloud in some way.

Hot flavors like cloud computing tend to be in demand with investors, and funds like SKYY race to provide traders with an ETF as a result — even if that ETF is unfocused.

The same is undoubtedly happening with the IPAY mobile payments ETF — as well as a sister product launching at the same time, the PureFunds ISE Big Data ETF (BDAT).

There may be good reasons for the strange holdings that make up IPAY. For instance, many pure plays in the mobile payments space are privately held — like Square, whose core business is mobile card readers, or Braintree, whose technology allows online businesses to process credit card payments. They don’t have publicly traded stock, so IPAY can’t invest in them.

But whatever the reason for the charitable definitions used by this and other “sector funds,” those looking for a pure play on mobile payments should steer clear.

A direct investment in a company like PayPal (PYPL) seems a more faithful trade for that trend.

Kyle Woodley is the Managing Editor of As of this writing, he was long PYPL. Follow him on Twitter at @KyleWoodley.

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