4 Investing Routes to Profit from FinTech

4 min read

Technologies constantly disrupt, modernize and in some cases, replace, a whole range of industries around the world. We thought of our jobs taken away, our overly tech-dependent lifestyles, as well as Skynet!

With all these thoughts of the future, however, we almost certainly agree that great wealth redistribution will come from these developments. Wouldn’t it be fantastic if one could ride on some of these big trends before their impact is even understood and felt?

Identifying golden opportunities early enough requires a broad range of domain expertise as well as imaginative capacity on the part of the investors.

Not just that, investing into developments that are significant but relatively unknown requires a certain mindset and long-term perspective that few people have, even if they consciously agree on the presence of ‘great opportunities’. There is this built-in limit of technology adoption in society that ensures only a minority in this world would ever reap most gains in any innovation.

So with all the hypes and promises of tech and a rapidly changing world, how could an investor more conveniently profit from the most promising directions, even without the knowledge, confidence, and the resources to keep themselves updated of all developments? Forget about skynet, great investment opportunities should still be accessible by everyone, at least in theory.

In this article, we walk through a few ways investors can develop a constant and feasible exposure to FinTech (and tech generally) and profit from most technological developments as they appear.

Exchange Trade Found

Exchange-Traded Funds

ETFs have exploded in popularity during the last 10 years or so. Mostly passive investments (although some are also actively managed), they provide a convenient way to gain broad exposure to a particular sector – in this case FinTech – and normally only for a modest fee.

The Global X FinTech ETF, for instance, tracks the performance of the Global FinTech Thematic Index, a market-cap-weighted index of 31 companies that provide FinTech products and services, specifically:

  • P2P and Marketplace Lending
  • Mobile Payments
  • Crowd-Funding
  • Blockchain and Alternative Currencies
  • Personal Finance Software, Automated Wealth Management and Trading
  • Enterprise Solutions

Each company must have at least $100 million market cap, plus over $2 million of daily traded volume on average over the previous six months. As such, the ETF represents an investment in the sector’s more established companies.

Other FinTech ETFs to consider include the KBW Nasdaq Financial Technology Index (KFTX), which tracks 49 FinTech companies publicly traded in the US, and the iShares Exponential Technologies ETF which tracks technology companies from developed and emerging economies.

Blockchain ETFs have also taken off in 2018, with four major funds having been launched so far. The two most promising thus far appear to be the actively managed Amplify Transformational Data Sharing ETF (BLOK), and the Reality Shares Nasdaq NexGen Economy ETF (BLCN) which tracks a Nasdaq index “designed to measure the returns of companies that are committing material resources to developing, researching, supporting, innovating or utilizing blockchain technology for their use or for use by others”.

But it’s worth noting that at this very early stage, blockchain ETFs don’t provide significant exposure to new companies in the blockchain space. Instead, the holdings are predominantly established, large-cap companies in which blockchain development only represents a fraction of the overall business strategy.

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While the blockchain ETF remains a work in progress, cryptocurrencies provide a purer way to gain direct blockchain exposure. And with over 1600 projects having issued cryptocurrency tokens, there are plenty of potential opportunities out there from which to choose.

Of course, crypto has remained notoriously volatile across the board during this early stage of market maturity. Nevertheless, it does offer you the opportunity to earn phenomenal gains, as we’ve witnessed with the likes of Bitcoin, Ethereum and many other projects during the last couple of years.

And with blockchain set to disrupt legacy business models across a multitude of industries over the next few years, there will undoubtedly be an increasingly diverse range of crypto-based projects from which you can choose.

That said, with regulation of the space still decidedly an ongoing progress, it is worth conducting detailed research before investing into crypto. Here are some questions to get you going.

Initial Coin Offerings (ICOs), meanwhile, offer a revolutionary way to invest in new blockchain start-ups. Wth tokens being available at heavily discounted rates during such events, the chance to substantially boost your returns is conceivable.

But again, with sufficient regulation yet to be put in place in most jurisdictions, the possibility of scam ICOs emerging remains all too real. Again, I can’t stress enough that if you go down this route, be as thorough in your research as possible.

Investing Routes to Profit from FinTech

FinTech Equities

You can always go back to the more traditional route of investing in individual companies within the FinTech ecosystem. That includes companies focused on blockchain, mobile payments, P2P lending, cloud computing, AI and RegTech, to name just a few.

Some of the most promising companies in the space are new, unquoted start-ups, which means that investing through a venture capital firm could prove to be a lucrative option.


Annual global VC-backed FinTech deals and financing, 2013 – 2017 ($Billion)(Source: CBInsights)

VC firms can identify the most promising companies and help them to grow towards profitability, as well as allow investors to participate at early, mid or late stages. But while this method offers high growth potential, it is accompanied with considerable risk given the large number of unknowns associated with small start-ups.

It isn’t just new start-ups that are catching the eye, though. Major companies have also moved heavily into the space. With payments playing an ever-increasing role in people’s lives through the use of smartphones and tablets, PayPal is making great strides to be at the forefront of this growth sector.

Other than Venmo, PayPal’s mobile payment app, the company recently acquired Stockholm-based payments provider iZettle which offers portable point-of-sale solutions for small businesses. It has also bought Jetlore, an AI-powered prediction platform that enables some of the top online retailers to deliver personalized customer experiences to increase sales and loyalty.

Another way to find FinTech companies with solid investment potential is to explore those companies that are listed as holdings in FinTech ETFs. If you prefer investing in stocks vis-à-vis funds, then drilling down to the ETF’s constituents provides a good way to identify companies that are already well-regarded, before conducting your own additional research into them.


Managed Funds

If you prefer to invest in just one product that covers the FinTech space in a much broader scope, an actively managed fund might be the best solution of all.

The benefit of choosing this option lies mainly in the expertise that you receive from experienced investment professionals. These fund managers performed extensive research across the sector, before forming their portfolio. Active management also ensures that the fund’s portfolio is regularly monitored and rebalanced appropriately.

Another important advantage is that a managed fund has the flexibility to invest across asset classes. All the vehicles we mentioned above – equities, ETFs, cryptos, and even projects, could be included in the fund’s portfolio for an optimal exposure to different developments and an improved reward-to-risk. Funds such as Atlanta, Crypto Asset Fund, and our own OC Horizon Fintech are examples of that.

Dr Justin Chan Dr Chan founded DataDrivenInvestor.com (DDI) and is the CEO for JCube Capital Partners. Specialized in strategy development, alternative data analytics and behavioral finance, Dr Chan also has extensive experience in investment management and financial services industries. Prior to forming JCube and DDI, Dr Chan served in the capacity of strategy development in multiple hedge funds, fintech companies, and also served as a senior quantitative strategist at GMO. A published author at professional journals in finance, Dr. Chan holds a Ph.D. degree in finance from UCLA.

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