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How Does FinTech Disrupt Your Investing and Trading?
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Many investors have stood on the sidelines for much of this bull market and wondered how it keeps going higher. Even many who have participated are wondering that now.
And while I can offer plenty of fundamental insight about the momentum of the economy and corporate earnings to explain investor appetite for stocks, there are other interesting forces and trends impacting the market and they revolve around technology innovations.
FinTech Will Continue to Disrupt in Surprising Ways
From paying and accepting payments with your phone via Square (SQ - Free Report) to high-tech insurance claim procedures that might involve IoT sensors or drones, the industry known as "fintech" (short for financial technology) will transform money, security, and investing in incredible ways in the next decade.
Since Blockchain was on everyone's mind last year, I decided then to do a podcast pitting two big innovations against each other...
In just 5 years, two new "exponential technologies" have been created that will dramatically change the world
If you asked me now which innovation wins the "bigger disruptor" award, I'd say the same thing as last year: CRISPR, hands down.
But that doesn't make fintech any less interesting because this fact is becoming visibly apparent: technology drives money flow.
To wit, in the video that accompanies this article, I share some research from a report by BlackRock (BLK - Free Report) on "factor investing."
The big number that stands out is $1.9 trillion. That's how much was invested as of 12/31/17 in the hodgepodge collection of quantitative ETFs, defined macro and "smart beta" strategies, and proprietary style algorithms. From the BlackRock report titled Factor Investing: 2018 Landscape...
Today, most institutions allocate investments in their portfolios along asset classes. This approach can double count risks and often does not lead to the true diversification that investors need. The portfolio of the future will be constructed in a much more factor-aware way. Based on the questions we have been fielding from clients, we expect that most institutions will complement their asset views with a factor lens within five years — and a significant fraction will be using factors directly to construct more robust portfolios and to meet specific investment outcomes.
In fact, the BlackRock team projects that factor investing will grow over 70% in five years to hit nearly $3.5 trillion AUM (assets under management) in 2022. Here are the drivers of this asset attraction...
There are a series of structural tailwinds fueling the growth of factor investing. Factor investing leverages transparent, low-cost, proven drivers of long-term returns. These qualities are increasingly important given our slower long-term growth environment, as well as greater client and regulatory scrutiny on fees and transparency. The academic foundation of factors makes them well suited for today’s environment, emphasizing well-defined, intuitive investment processes, repeatability, and scale.
That last sentence highlights a key difference between factor strategies and typical systematic alpha-seeking hedge funds, which can still have too much of the human decision-making element at play. Factor strategies that focus on unique mixes of asset class, sector, and market cap are still grounded in time-tested academic research and models, not the latest alpha fad.
And one of my conclusions is this: If institutional fund managers are increasingly allocating to these strategies -- whether because they want to look "smart" or just can't keep up with the market on their own -- it helps explain why the market continues to climb as active managers struggle.
I would go so far as to say that factor investing and other automated investing (including passive indexing) is nearly as much to blame for the doubling of Amazon (AMZN - Free Report) shares in the past year as pure investment logic. Competition for shares is always a factor in stock appreciation.
This said, some of these strategies that try to systematically avoid volatility have themselves struggled this year as the VIX stays low and the indexes climb. But they are not places where large investors are parking all their money. They are more like overlays to primary strategies.
Asset Managers Are Scrambling to Adapt
We know the commission pricing war among brokers is reaching fever pitch when JPMorgan (JPM - Free Report) steps into the breach with free trades for a year. But there's more going on than the price of a trade to attract -- or stop the exodus of -- investment accounts.
For more on JPM's dive into the broader fintech, check out this podcast and article...
Jamie Dimon's JPMorgan just launched a Blockchain platform based on a very different cryptocurrency
Part of my inspiration to make today's video and article on fintech was a piece by Michael Santolli of CNBC this morning. He gave his work the auspiciously long (but necessary) title...
Santolli was talking about the asset managers like BlackRock, T. Rowe Price, and Franklin whose stock prices are depressed despite the charging bull. He cites many causes of the fear and loathing for these businesses, now trading at steep historical discounts to their longer-run valuations.
Beside the predominance of low-cost indexing sucking cash away from active managers, Santolli wrote...
Clients increasingly rely on high-tech gatekeepers -- whether financial supermarkets such as Schwab (SCHW - Free Report) or software-driven "roboadvisors" -- that funnel cash into ETFs, not on human brokers with strong active-manager relationships.
Speaking of roboadvisors, I also share research of mine and others on firms like Betterment, Wealthfront, Acorns, and qPlum who are attracting Millennial investors with more choices, control, and, of course, high-touch technology. Here were two article/podcasts I did last year on these innovators...
AI is not a replacement for stock-picking, but it will become a powerful ally against bad decision-making
The second podcast has an interview with the founder and CIO of qPlum, Gaurav Chakravorty. It's a really good discussion to help you understand what they offer and how their AI investing platform was conceived and built. His explanation of "automated market timing" to avoid the "worst days" is especially interesting.
What Does It All Mean for Individual Investors and Traders?
I think these innovations are great news for individual investors who follow their own systematic plans.
Why do I think that? Because it makes the overall market less emotional when more money is being allocated to long-term, systematic, back-tested, and macro-defined strategies. Sure, if all the smart beta and factor funds start doing more active market timing like qPlum, then my low-volatility argument vanishes.
But most of the factor strategies are based on longer-term horizons that lean on the academic research which shows missing the "best days" is never worth market timing.
And for traders, I think fintech innovations increase market liquidity with more long-term automated strategies and less short-term algo vacuums. But they may also drive demand for stocks -- and thus valuations -- to unreasonable levels, squeezing out any margin of safety one might compute.
They also set an example for a practice that I've been pounding the table about for over a decade: the only way for a discretionary trader to succeed long-term in the markets is by being as systematic and rules-based as possible. The more you can quantify your trade selection and risk management across thousands of daily options, the better off you will be in the long run.
One last tip for traders: don't use hard trend lines. See this tutorial to understand why...
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators services. Click Follow Author above to receive his latest stock research and macro analysis.
The Best & Worst of Zacks
Today you are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. From 1988 through 2015 this list has averaged a stellar gain of +26% per year. Plus, you may download 220 Zacks Rank #5 "Strong Sells." Even though this list holds many stocks that seem to be solid, it has historically performed 11X worse than the market.
Image: Bigstock
How Does FinTech Disrupt Your Investing and Trading?
Many investors have stood on the sidelines for much of this bull market and wondered how it keeps going higher. Even many who have participated are wondering that now.
And while I can offer plenty of fundamental insight about the momentum of the economy and corporate earnings to explain investor appetite for stocks, there are other interesting forces and trends impacting the market and they revolve around technology innovations.
FinTech Will Continue to Disrupt in Surprising Ways
From paying and accepting payments with your phone via Square (SQ - Free Report) to high-tech insurance claim procedures that might involve IoT sensors or drones, the industry known as "fintech" (short for financial technology) will transform money, security, and investing in incredible ways in the next decade.
Since Blockchain was on everyone's mind last year, I decided then to do a podcast pitting two big innovations against each other...
Bitcoin or CRISPR: Which is the Bigger Disruptor? / November 2017
In just 5 years, two new "exponential technologies" have been created that will dramatically change the world
If you asked me now which innovation wins the "bigger disruptor" award, I'd say the same thing as last year: CRISPR, hands down.
But that doesn't make fintech any less interesting because this fact is becoming visibly apparent: technology drives money flow.
To wit, in the video that accompanies this article, I share some research from a report by BlackRock (BLK - Free Report) on "factor investing."
The big number that stands out is $1.9 trillion. That's how much was invested as of 12/31/17 in the hodgepodge collection of quantitative ETFs, defined macro and "smart beta" strategies, and proprietary style algorithms. From the BlackRock report titled Factor Investing: 2018 Landscape...
Today, most institutions allocate investments in their portfolios along asset classes. This approach can double count risks and often does not lead to the true diversification that investors need. The portfolio of the future will be constructed in a much more factor-aware way. Based on the questions we have been fielding from clients, we expect that most institutions will complement their asset views with a factor lens within five years — and a significant fraction will be using factors directly to construct more robust portfolios and to meet specific investment outcomes.
In fact, the BlackRock team projects that factor investing will grow over 70% in five years to hit nearly $3.5 trillion AUM (assets under management) in 2022. Here are the drivers of this asset attraction...
There are a series of structural tailwinds fueling the growth of factor investing. Factor investing leverages transparent, low-cost, proven drivers of long-term returns. These qualities are increasingly important given our slower long-term growth environment, as well as greater client and regulatory scrutiny on fees and transparency. The academic foundation of factors makes them well suited for today’s environment, emphasizing well-defined, intuitive investment processes, repeatability, and scale.
That last sentence highlights a key difference between factor strategies and typical systematic alpha-seeking hedge funds, which can still have too much of the human decision-making element at play. Factor strategies that focus on unique mixes of asset class, sector, and market cap are still grounded in time-tested academic research and models, not the latest alpha fad.
And one of my conclusions is this: If institutional fund managers are increasingly allocating to these strategies -- whether because they want to look "smart" or just can't keep up with the market on their own -- it helps explain why the market continues to climb as active managers struggle.
I would go so far as to say that factor investing and other automated investing (including passive indexing) is nearly as much to blame for the doubling of Amazon (AMZN - Free Report) shares in the past year as pure investment logic. Competition for shares is always a factor in stock appreciation.
This said, some of these strategies that try to systematically avoid volatility have themselves struggled this year as the VIX stays low and the indexes climb. But they are not places where large investors are parking all their money. They are more like overlays to primary strategies.
Asset Managers Are Scrambling to Adapt
We know the commission pricing war among brokers is reaching fever pitch when JPMorgan (JPM - Free Report) steps into the breach with free trades for a year. But there's more going on than the price of a trade to attract -- or stop the exodus of -- investment accounts.
For more on JPM's dive into the broader fintech, check out this podcast and article...
Blockchain 101: If Bitcoin's a Fraud, How is Ethereum Different? / November 2017
Jamie Dimon's JPMorgan just launched a Blockchain platform based on a very different cryptocurrency
Part of my inspiration to make today's video and article on fintech was a piece by Michael Santolli of CNBC this morning. He gave his work the auspiciously long (but necessary) title...
These stocks should be booming during this historic bull market, but instead some are down 40%
Santolli was talking about the asset managers like BlackRock, T. Rowe Price, and Franklin whose stock prices are depressed despite the charging bull. He cites many causes of the fear and loathing for these businesses, now trading at steep historical discounts to their longer-run valuations.
Beside the predominance of low-cost indexing sucking cash away from active managers, Santolli wrote...
Clients increasingly rely on high-tech gatekeepers -- whether financial supermarkets such as Schwab (SCHW - Free Report) or software-driven "roboadvisors" -- that funnel cash into ETFs, not on human brokers with strong active-manager relationships.
Speaking of roboadvisors, I also share research of mine and others on firms like Betterment, Wealthfront, Acorns, and qPlum who are attracting Millennial investors with more choices, control, and, of course, high-touch technology. Here were two article/podcasts I did last year on these innovators...
Deep Learning Goes to Wall Street / November 2017
Fintech innovations are changing investing tools and behavior in powerful ways that you must begin to explore
How Will Artificial Intelligence Change Your Investing? / December 2017
AI is not a replacement for stock-picking, but it will become a powerful ally against bad decision-making
The second podcast has an interview with the founder and CIO of qPlum, Gaurav Chakravorty. It's a really good discussion to help you understand what they offer and how their AI investing platform was conceived and built. His explanation of "automated market timing" to avoid the "worst days" is especially interesting.
What Does It All Mean for Individual Investors and Traders?
I think these innovations are great news for individual investors who follow their own systematic plans.
Why do I think that? Because it makes the overall market less emotional when more money is being allocated to long-term, systematic, back-tested, and macro-defined strategies. Sure, if all the smart beta and factor funds start doing more active market timing like qPlum, then my low-volatility argument vanishes.
But most of the factor strategies are based on longer-term horizons that lean on the academic research which shows missing the "best days" is never worth market timing.
And for traders, I think fintech innovations increase market liquidity with more long-term automated strategies and less short-term algo vacuums. But they may also drive demand for stocks -- and thus valuations -- to unreasonable levels, squeezing out any margin of safety one might compute.
They also set an example for a practice that I've been pounding the table about for over a decade: the only way for a discretionary trader to succeed long-term in the markets is by being as systematic and rules-based as possible. The more you can quantify your trade selection and risk management across thousands of daily options, the better off you will be in the long run.
One last tip for traders: don't use hard trend lines. See this tutorial to understand why...
Trend Lines Are Mathematically Absurd
Kevin Cook is a Senior Stock Strategist for Zacks Investment Research where he runs the TAZR Trader and Healthcare Innovators services. Click Follow Author above to receive his latest stock research and macro analysis.
The Best & Worst of Zacks
Today you are invited to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buys" free of charge. From 1988 through 2015 this list has averaged a stellar gain of +26% per year. Plus, you may download 220 Zacks Rank #5 "Strong Sells." Even though this list holds many stocks that seem to be solid, it has historically performed 11X worse than the market.
See these critical buys and sells free >>