Many financial companies are slow-growing and balance sheet intensive, making them more common in value funds and usually less appealing to growth strategies. However, there are asset-light firms that have competitive advantages and that are benefiting from secular trends. This was a key message from Josh Saltman, portfolio manager at Baron Capital.
Baron Capital hosted its 32nd Investment Conference in New York last week. VettaFi was in attendance, but the well-organized event was primarily for investors in Baron Capital mutual funds. The morning sessions included presentations by executives from companies owned by Baron, including Harley Finkelstein, president at Shopify. Attendees also got to ask questions of veteran portfolio managers like Saltman and his colleagues.
Delivering a Long-Term Philosophy Via ETFs
Saltman manages the Baron Fintech mutual fund that is being converted into an ETF according to a regulatory filing. The soon-to-be renamed Baron Financials ETF will be part of a suite of active ETFs expected to be available by the end of 2025.
Baron Capital’s philosophy is centered on investing in businesses with durable competitive advantages and exceptional management teams. They view themselves as business owners and focus on the fundamental, long-term potential of a company rather than short-term market fluctuations.
“We can deliver our long term philosophy through the ETF structure,” said Michael Baron, co-president and portfolio manager at Baron Capital, during an afternoon session at the conference. “These will not be trading vehicles but foundational investment strategies.”
Baron Capital is seeking to tap into growing demand for ETFs. Saltman talked about owning many companies that are benefiting from the still robust usage of passive ETFs. Baron Fintech Fund owns index providers such as MSCI and S&P Global, asset manager Blackrock, and brokerage firms Charles Schwab and LPL Financial.
Saltman also highlighted stakes in payment processing companies Mastercard, Shopify, and Visa. These are classified as information technology stocks by GICS, but are benefiting as more shopping experiences around the globe are cashless.
At the conference, Shopify’s Finkelstein highlighted how its software helps entrepreneurs and established businesses build their ecommerce presence and sell everything anywhere. He further talked about Shopify’s efforts to support merchants and consumers incorporating artificial intelligence in their businesses.
Contrasting Strategies: Active vs. Index Based FinTech
The pending Baron Financial ETF will be joining a group of other thematic ETFs focused on the fintech industry. The actively managed ARK Fintech Innovation ETF (ARKF) has $1.2 billion in assets and recently had a 9% position in Shopify. Coinbase, Robinhood, and Toast were among its other top positions.
Meanwhile, the Global X Fintech ETF (FINX) is another thematic ETF but follows an index-based approach. The $280 million ETF has its large weighting in Coinbase at 7%. Intuit, PayPal Holdings, and SoFi were other large positions.
Education About Financial-Related ETFs
All three of these funds are notably different from the $54 billion Financial Select Sector SPDR ETF (XLF) and the $13 billion Vanguard Financials ETF (VFH). The index-based ETFs are heavily weighted toward banks and insurance companies. Examples include Bank of America, Berkshire Hathaway, and JPMorgan. Being able to educate ETF investors about the benefits of a thematic approach is key to the prospects for Baron and its soon-to-be peers.
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