Thematic investing with ETFs: Cybersecurity

Sep 25th, 2017 | By | Category: Equities

The big idea of thematic investing is to identify sections of the market, most often equities, that look set to benefit from long-term structural changes such as changing demographics or technological breakthroughs. It is a style of investing that focuses on broad macro trends in the global economy, depending on forward-looking analysis rather than past performance. It requires investors to move away from worrying about short-term performance relative to a benchmark and consider longer-term positions that take time to mature.

Thematic investing with ETFs: Cybersecurity

The ETFS ISE Cyber Security UCITS ETF has already gathered $308m in assets since its launch in 2015.

Due to the top-down nature of stock selection involved in thematic investing, ETFs are the perfect way to access the segment, offering a convenient and cheap way to gain exposure to a particular part of the market.

Investors can now choose from a wide range of thematic ETFs, including those that aim to give exposure to megatrends such as obesity, the internet of things, ageing populations, climate change and millennials among many other things.

This five-part series of articles will focus on a different thematic play each day and discuss how investors can use ETFs to reach their thematic investing goals. In this first article, we turn our attention to cybersecurity.

As more and more of our existence becomes digitised, cybersecurity is becoming ever more important. From our work lives to our cars to our homes, everything is increasingly controlled by code which, in conjunction with increased connectivity, means that cybersecurity will be of paramount importance to all of us in the years to come.

Every few months another cyber attack makes the news including the WannCry ransomware incident that hit the NHS earlier this year, the Panama Papers hack, Yahoo’s revelation last year that it had suffered the largest corporate data breach in history and more recently Equifax’s data breach. Just last week, Ian Levy, technical director of the National Cyber Security Centre, said that he expects the UK will suffer a category-one cyber attack, the most serious level of attack “in the next few years”.

There is one European-domiciled ETF that gives investors pure-play exposure to an increase in demand for cybersecurity, the ETFS ISE Cyber Security GO UCITS ETF (LON: ISPY) from ETF Securities. The fund was launched in September 2015 and tracks the ISE Cyber Security UCITS Index, which is comprised of companies actively involved in providing cybersecurity technology and services, with certain liquidity, size and trading volume constraints.

Companies in the index are either those that work to develop hardware and/or software that safeguards access to files, websites and networks, both locally and from external origins (“Infrastructure Provider”) or those that utilize these tools to provide consulting and/or cybersecurity services to their clients (“Service Provider”). The two groups are market cap weighted whereas the constituents within each group are equal weighted.

The index currently has 38 members, the largest being Splunk, Qualys and Sophos, each with around a 4.2% weight. The fund is fully physically replicated and reinvests any dividends received. In the year to 22 September 2017, the ETF returned 5.9%. The fund has $308 million in assets and has a total expense ratio (TER) of 0.75%.

Another European-domiciled fund that offers exposure to cybersecurity is the iShares Digitisation UCITS ETF (LON: DGTL), which was launched in September 2016. The fund tracks the iSTOXX Factset Digitalisation Index which is comprised of global equities that derive a substantial proportion of their revenues from digitally focused services including cybersecurity.

The ETF uses optimised replication and has $93m in assets with a TER of 0.40%.

Investors could also potentially consider a couple of US-listed ETFs, including the First Trust NASDAQ Cybersecurity ETF (Nasdaq: CIBR), which was launched in 2015 and has $315m in assets under management (TER of 0.60%), or the ETFMG Prime Cyber Security ETF (NYSE: HACK), the world’s first dedicated cybersecurity ETF, which was launched in 2014 and has over a billion dollars in AUM. TER 0.60%.

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