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A simple way to invest in an emerging theme

07/14/2021 | 11:20am EDT

Fundamental trends, or megatrends, have always been part of thematic strategies deployed by investors. They tend to be democratised among private investors, who now have simple and inexpensive tools to put their convictions into practice. Fintech is obviously one of them. It is at the crossroads between finance and technology and benefits from the digitalisation of the world, from the (almost) universal access to smartphones and the simplification of payment methods.

But it's not enough to be convinced, you also have to figure out how to go about it.

The choice of a thematic fund or ETF immediately comes to mind. This allows us to gain exposure without spending hours choosing our stocks. We can also look at the current market leader... but will it still be tomorrow? Leaders tend to change regularly in very competitive and fast-growing sectors. This is even more true when it comes to technology. Visa may be the leader in card payments today, but no one can say whether the card will still be in use in 10 or 20 years. And markets tends to rotate champions quickly and anticipate the real economy several years in advance.

Here is a simple idea to invest in a growth theme, while remaining diversified on selected players:

First of all, let's go back to this theme. Unlike banking and insurance stocks, "fintech" stocks are usually a bit expensive. They are also often more difficult to understand. Their growth potential depends heavily on market competition.

Today, fintechs are developing rapidly because they benefit from a favorable environment that allows them to offer innovative and diversified banking and financial services. Fintechs have been around for many years. Paypal launched the electronic wallet in 1998. However, it is only recently that they have experienced significant growth. According to Accenture, annual investment in fintech was $928 million in 2008 compared to $105 billion in 2020, more than 100 times higher.

But it can be a difficult sector since it includes thousands of companies (nearly 10,000 to be more accurate). As a proof, Forbes selects every year 50 companies with great prospects in its Fintech 50 ranking.

Source: Forbes Fintech 50 2020

Choosing ten "fintech" stocks instead of one reduces the individual risk of the stock. In a rapidly changing market, we don't know which players will succeed, whether current leaders such as Visa, Mastercard and Paypal will continue to prosper or, on the contrary, leave their places to more agile companies such as Adyen, Square or StoneCo. Betting on 10 stocks allows you to avoid losing your investment on your "fintech" pocket if you have the misfortune to fall on a Wirecard 2.0.

We have therefore weighted the selection to have 10% on each company by selecting leaders in different payment methods and software related to finance. We find older stocks(American Express, Visa, Mastercard, Fiserv, etc) and newer ones (Square, StoneCo, etc). They are all growing and have good prospects for the coming years to conquer new markets.

Year-on-year stock performance:

Data for the "fintech" portfolio vs. its benchmark, the S&P 500 index:

In our case, picking Fiserv would have only returned 13.50% in one-year performance versus 88.90% for Square. The selection allows you to generate a performance of 50.51% over a rolling year and 146.87% since 26/10/2018 (date of the listing of StoneCo Ltd, the smallest of our selection), much better than the market or most other banking stocks.


© MarketScreener.com 2021
Stocks mentioned in the article
ChangeLast1st jan.
ADYEN N.V. 1.76% 2744 Real-time Quote.41.55%
AMERICAN EXPRESS COMPANY 0.80% 162.63 Delayed Quote.33.44%
FISERV, INC. 0.18% 108.55 Delayed Quote.-5.68%
INVESCO KBW NASDAQ FINTECH UCITS ETF ACC - USD 0.90% 49.19 Delayed Quote.13.94%
MASTERCARD 0.45% 346.31 Delayed Quote.-3.12%
PAYPAL HOLDINGS, INC. 0.19% 282.97 Delayed Quote.20.59%
SQUARE, INC. 2.53% 255.09 Delayed Quote.14.32%
STONECO LTD. 0.15% 40.9 Delayed Quote.-51.33%
VISA 0.23% 224.33 Delayed Quote.2.32%
WIRECARD AG 7.56% 0.249 Delayed Quote.-25.83%
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