- Financial exchanges have been all-weather stocks with countercyclical qualities
- These businesses have been profitable and have generated strong cash flows.
- Competitive moats have widened, driven by industry consolidation.
Financial sector headlines are often dominated by banks and insurers. But there is one area that has emerged as a steady grower and dividend payer: financial exchanges.
Exchanges’ gains contrast against steep declines in the broader financials sector, where traditional banks in particular have grappled with ultra-low rates and a slowing global economy. Over the past several years, many exchange operators across the globe have seen strong share price rises, including Nasdaq, the London Stock Exchange Group and Hong Kong Exchanges and Clearing.
We think exchanges are solid companies that offer a number of attractive characteristics for both growth- and income-oriented portfolios. These businesses typically have high barriers to entry, high margins, low capital spending needs and strong free cash flows. They have returned plenty of capital to shareholders, and shares of most companies provide some yield. And compared to banks, exchanges have required less operating capital and have provided greater returns on invested capital.