Financial technology, or fintech for short, is on a roll. While the exact definition for this alluring subsector can be quite varied, the term generally applies to those companies engaged in developing and deploying technology designed to make financial services more efficient.

If life imitates art, then in financial circles it might be said that exchange-traded-funds, or ETF’s, imitate market trends. The pattern is clearly evident in the steady growth of ETF’s during each phase of an emerging sector’s rise in popularity.

For example, gold’s spectacular run from below $300 per ounce at the beginning of this century to $1,900 in late 2011 was accompanied by the creation of numerous gold ETF’s. The most popular one saw a tenfold increase in the number of its outstanding shares.

Quite predictably then, the rising tide of fintech has spurred the launch of a new index. This new fund, sponsored by Wall Street research firm, Keefe Bruyette and Woods (KBW) and the Nasdaq, will mirror the performance of the KBW Nasdaq Financial Technology Index which has outperformed the S&P 500 by more than eight per cent annually over the past five years.

Components of the index include large stalwarts including Visa Inc and MasterCard Inc, in addition to many niche players such as the Lending Club which came public less than two years ago and has a total market value almost one hundred times smaller than Visa.

The fintech moniker became popular as a result of the proliferation of Silicon Valley start-ups aimed at disrupting traditional banking and financial services platforms. Almost everywhere, the internet is rapidly changing the way consumers do business. Just as Amazon.com has disrupted the traditional retail shopping mall, financial services customers are looking for technology to provide lower costs, faster execution and more intelligent processing of data.

Silicon Valley’s answer to the quest for efficiency has been new companies such as Square Inc, which allows point-of-sale software tracking through mobile phones and Transferwise Limited, which facilitates a more efficient process for exchanging currencies across borders. Cutting-edge fintech companies are also involved in direct lending, or ‘crowd sourcing’ which matches potential investors directly with entrepreneurs and hopeful start-ups, thereby circumventing segments of the traditional investment banking and venture capital businesses.

The internet itself has been a source of growth. For example, PayPal Inc, once part of Ebay Inc, has grown rapidly by facilitating secure payments within the online auction house. Later, PayPal was spun out on its own and continues to thrive by enabling transactions between buyers and sellers across an even broader array of websites. PayPal is a component of the new index.

Fintech is expected to enjoy a steady ramp upwards as the world continues to move towards a more cashless society and cheques become largely a thing of the past. Mobile payments represent the newest trend in finance and other non-traditional players are becoming involved. For example, Apple Inc is banking on services such as Apple Pay to complement its other service platforms and help smooth out the wide revenue swings associated with its hardware product cycles and the inevitable saturation of the smartphone market.

Heavy hitters including Apple and Google are in on the game, but even the commercial banks and asset managers cannot be counted on to stay away. Industry analysts expect ongoing deals in this space as the empire strikes back against the upstarts. Large banks will need to make decisions about whether to build or buy advanced financial services modules. Heavyweight asset manager, Blackrock Inc recently announced it was buying a privately held ‘robo’ financial advisor company.

Apart from further M&A activity, stand-alone opportunities abound within the burgeoning digital economy. Payment processor, Vantiv, for example is benefiting greatly from the ongoing shift in credit cards away from traditional plastic which needs to be swiped at point of sale, towards new ones with embedded microchips. Vantiv makes the new chip cards and also accepts payments on behalf of the merchants, thereby acting as an electronic middleman. Earnings growth for Vantiv has exceeded 20 per cent annually over the past few years. With only a third of US cards on the newer system, this trend has much farther to run.

The fintech subsector may seem too trendy to some investors and others might shy away on the basis of valuation or even perhaps the industry’s vulnerability to a global economic downturn. Even considering these risks, we believe that the largest companies, including as Mastercard and Visa are worth a look here. As well, several of the smaller, niche players such as PayPal and Vantiv are intriguing on an intermediate to longer term basis.

This communication is for information purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument, investment product or service. Readers should consult with their Brokers if such information and or opinions would be in their best interest when making investment decisions. LOM is licensed to conduct investment business by the Bermuda Monetary Authority.