There Will Always Be Change
Creative destruction is the hallmark of progress. We can think of it as economic innovation. There is actually an entire page on Wikipedia devoted to it. You can check it out here. According to the site, it is a concept in economics which since the 1950s has become most readily identified with the Austrian-born economist Joseph Schumpeter[1] who derived it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle.
That has me thinking about what this could mean for certain investment ideas beyond the traditional equity indexes. Drilling down to the sector level of the market, it may become easy to dismiss a certain area of the market based on old norms or by looking at the sector in the traditional sense as opposed to what is potentially new and exciting.
The first is the financial sector of the equity market. When you hear “financial sector” if you are like me, the first thing that probably comes to mind is banks. But the financial sector is much larger than just the banks. There are consumer credit companies, there are insurance companies. There are also companies that cater to the capital markets industry. While the financials have seen an improvement of late, this is a group that is ripe for disruption. It has been ripe for disruption for a long time. The Global Financial Crisis in 2008 / 2009 was probably the catalyst.
According to the team at ARK Invest, a company is deemed to be engaged in the theme of Fintech innovation if (i) it derives a significant portion of its revenue or market value from the theme of Fintech innovation, or (ii) it has stated its primary business to be in products and services focused on the theme of Fintech innovation.
In fact, they have an entire fund dedicated to the theme, the ARK FinTech Innovation ETF (ARKF) The Adviser defines “Fintech innovation” as the introduction of a technologically enabled new product or service that potentially changes the way the financial sector works, which ARK believes includes but is not limited to the following business platforms:
Transaction Innovations
Blockchain Technology
Risk Transformation
Frictionless Funding Platforms
Customer Facing Platforms
New Intermediaries
It probably does not make sense to dismiss the financial sector immediately (these things take time) but it does make sense to broaden our view of what makes it up.
The same goes for the energy sector. There is no denying that the group has had its share of trouble but the stocks have been improving of late. I actually think that Energy, fossil fuels, will do well under a Biden administration but in the long run, this is a sector of the market that is likely in secular decline. Have a look at the 10-year trend.
However, the same question applies here. Should we dismiss energy all together or would we be better served to alter our view of what constitutes an energy company? I would argue for the latter if the creative destruction theme is playing out here as well.
Take a look at the Invesco Solar ETF (TAN) over the past 10 years.
The world is evolving and so are the investment opportunities available to us. Taking a broader view of the market, beyond what we have “traditionally” known, can put us in a position to take advantage of these opportunities as they play out over the years and possibly decades ahead.
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*Noting in these pages constitutes investment advice.