Goldman Sachs is launching an interesting suite of new ETFs to help investors gain exposure to emerging areas of technology. The bank’s new offerings include ETFs for human genome research and robotic surgery. In total, the firm launched five new ETFs driven by a strategic partner specializing in calculating companies’ thematic beta. The other ETFs cover innovative financial, data, and manufacturing companies.
FINSUM: This could be an interesting small allocation to portfolios. Some clients are very hot on these new technologies and this might be a nice liquid way to access them. Fees are 50 basis points.
There has been hype for several years about the chances for the growing tech industry to absorb and dominate some of the domain of the finance sector. Examples already abound, such as tech companies taking market share in currency transfers or in every day payments. Amazon is providing payment services and financing to merchants, for example. Now big banks are fighting back, pushing regulators to subject tech companies to the same rules and scrutiny to which they are forced. They argue that not doing so will hinder transparency and threaten the global financial system.
FINSUM: This just seems like another of the many areas where a regulatory push is mounting against tech.
A distinguished law professor from Texas A&M has put out an article arguing that investors should stop worrying so much about a new crisis erupting on Wall Street and start paying attention to the one brewing in Fintech. William Magnuson contends that Fintech, the young financial technology sector, is where the next crisis will come from. The sector has come to grab a major position in the financial industry and is led from Silicon Valley, not New York. Its structure makes it uniquely exposed to a crisis, says Magnuson. For instance, its younger and less-well-capitalized businesses are more susceptible to quick failures (like Mt Gox in 2014), and its companies have no sense of coming together for the greater good to solve a crisis. Finally, its young technologies are less well-regulated and more opaque (making them harder to monitor).
FINSUM: So we agree that Fintech could be the epicenter of a crisis, but not any time soon. Fintech, even counting Bitcoin, is not integrated into the economy or market enough to cause a crisis. And on top of that, what is the catalyst for a meltdown?
There has been a lot of talk in media recently about how ETFs and other forms of passive management are beating the life out of active management and mutual funds. With that in mind, this piece considers the future of the RIA business. Charles Schwab recently conducted a survey of over 1,100 firms and found startlingly good news that would be the envy of the whole investment business. Overall, RIA firms had 28.2% operating income margins last year, up a full point over the previous year and up six points over 2011. Better technology and back office automation have helped margins, said Schwab. And in a sign that is very promising for the future, firms are reinvesting the proceeds, with 97% of RIAs planning to hire investment professionals or relationship managers in the next year.
FINSUM: This is a very good sign for the health of the industry. The future of RIAs looks very bright, especially considering the new mandated fiduciary standard will provide a tail wind.
Source: Wall Street Journal
This Financial Times article argues that the growing, but now in turmoil, peer-to-peer lending industry is very similar to the subprime lending boom that sparked the Financial Crisis. The article says that just like subprime, peer-to-peer, or “marketplace lenders” as they are now called, present a clever new way to make money with loans to a hungry audience at a time when the market is starved for returns. The industry has been and is still growing quickly, but valuations are suffering, with the industry leader, Lending Club, worth only $1.7 bn versus $8 bn in its public market debut in late 2014. Regulatory oversight and a scandal at Lending Club is now pressuring the sector, and the market leader as well as Prosper, the industry’s number two, are trying to raise capital to strengthen their finances. The piece says the loans are similar to subprime for three reasons: firstly, the lenders themselves have no skin in the game, secondly, there is very little data on loan quality, and thirdly, there is little information on collateral.
FINSUM: Good article with some concise analysis of the sector. We do not think the sector will go bust, but it does look bound to get reigned in by regulators.
Source: Financial Times