Finding Durable Quality in the Financial Sector

Financials are an often-overlooked sector. The sector is bifurcated between legacy banks and insurers, which have established operating histories but offer commodity products with low returns, and fintechs that grow quickly but also carry high risk. Yet, identifying durable quality businesses within the sector allows investors to capture both the durability of strong moats and the upside of innovation-led growth.

What are the Sources of Durable, Tangible, and Dominant Moats for Financial Stocks

Much of financial activity is very competitive, making it difficult to build durable moats. Money is fungible and many services are commoditized. We believe moats exist in three major forms:

1. Financial Networks

A classic source of durable competitive advantage, networks grow stronger with more users. Exchanges and payment networks are prime examples. Trading equities, derivatives, and commodities requires deep liquidity, prompting traders to go to the most liquid exchanges. Liquidity attracts liquidity.

As a result, some exchanges dominate certain financial instruments. 90% of the world’s Brent crude oil contracts are traded on Intercontinental Exchange, while all S&P 500 index options trade on CBOE¹.

Payments are also a form of network. One simply has to think of the world before card networks to appreciate how difficult payments were. Today, Visa is accepted in 200 countries² around the world, connecting millions of merchants to billions of customers.

2. Switching Costs

Due to regulation and information asymmetry, financial markets often coalesce around certain standards. Switching away from these is costly and requires trillion dollar ecosystems to entirely retool. An example is the FICO score, synonymous with consumer credit scoring. For mortgages this credit score, which costs just $5, is well understood by consumers and the bedrock of risk models for lenders, servicers, and secondary markets alike.

3. Data

Financial data has several characteristics that imbue it with competitive advantages.

First, data is proprietary and generated in unique real world situations. For example, credit decisions by bank managers are a key data input allowing Moody’s CreditLens to serve as the go to database for credit analysis.

Second, the data series itself is often a standard, which has similar network effects. S&P or MSCI index benchmarks are used by fund managers and clients alike.

Third, this data is piped into customer systems, making it mission critical and hard to switch away from. Orbis, a Moody’s database, holds records on 600m public and private companies³ – a vital source of KYC (Know Your Customer) and other information for global businesses. In a world of AI the relative value of data rises, making this moat even stronger when others, like software code, erode. 

What Are Durable Quality Financial Subsectors

What are the Advantages of Investing in Durable Quality Financials

Durable quality financials strike a balance between growth and resilience. 

There are multiple growth drivers for the financial sector. The increased financialization of real world activity allowing greater risk management and flexibility. The rise of digital assets as new payments technologies. The rising need for financial products as people live longer and healthier lives. However, many fintechs focused on these growth areas are risky, unprofitable, and and face intense competition. Durable quality financials offer a stronger foundation from which to participate in this growth. These firms invest heavily in financial innovation, and have the right distribution channels to bring it to market.

Traditional financial firms, like banks and insurers, have long, established operating histories. They have experienced many credit and regulatory cycles, testing their operations. However, these firms are often low return and offer commoditized products.

Durable quality firms have many of the key features of traditional firms – like long, established operating histories – but, by virtue of their moats, have broken free of commoditization and low returns.

How to Invest in Durable Quality Financials

The Tema Durable Quality Fund (TOLL) currently* has 30% of the fund invested in durable financials, a big overweight vs. the S&P 500. Historically, the fund has held between 25-30% of its assets in these companies.

* as of November 2025

TOLL Has Consistently High Exposure to the Financial Sector  

Source: Bloomberg data as of September 2025.

Bottom Line

The financial sector has the potential to offer both innovative growth and durability, but achieving this balance requires careful selection of durable quality financials.

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Disclosures

Some of the companies highlighted are holdings of the Tema Durable Quality ETF portfolio. Holdings subject to change. For the fund's current holdings, visit the fund detail page.

Risk Information

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s prospectus or summary prospectus, which may be obtained by visiting www.temaetfs.com/toll. Read the prospectus carefully before investing.

Investing involves risk including possible loss of principal. There is no guarantee the adviser’s investment strategy will be successful.

Sector Focus Risk: The Fund may invest a significant portion of its assets in one or more sectors, including Engineering and construction, Financial Sector, FinTech, Industrials and Infrastructure, and thus will be more susceptible to the risks affecting those sectors than funds that have more diversified holdings across several sectors.

The success of the Fund’s investment strategy depends in part on the ability of the companies in which it invests to maintain proprietary technology used in their products and services. Companies in which the Fund invests will rely, in part, on patent, trade secret and trademark law to protect that technology, but competitors may
misappropriate their intellectual property, and disputes as to ownership of intellectual property may arise. Similarly, if a company is found to infringe upon or misappropriate a third-party’s patent or other proprietary rights, that company could be required to pay damages to such third-party, alter its own products or processes, obtain a license from the third-party and/or cease activities utilizing such proprietary rights, including making or selling products utilizing such proprietary rights. These disputes and litigations may be detrimental to performance.