WisdomTree has launched a new thematic equity ETF in Europe providing smart beta exposure to the cybersecurity space.
Nadav Zafrir, Managing Partner at Team8.
The WisdomTree Cybersecurity UCITS ETF offers access to cybersecurity firms in both developed and emerging markets while tilting towards pure-play businesses with strong revenue growth.
The fund has listed on the London Stock Exchange in US dollars (WCBR LN) and pound sterling (CYSE LN), and on Deutsche Börse Xetra (W1TB GY) and Borsa Italiana (WCBR IM) in euros.
It is linked to the WisdomTree Team8 Cybersecurity Index, a proprietary strategy index developed in partnership with Team8, a global venture capital group and incubator investing at the intersection of cyber, data, artificial intelligence, and fintech.
Team8’s leadership team includes retired Admiral Michael S. Rogers, former Commander of U.S. Cyber Command and Director of the National Security Agency, and Nadav Zafrir, a former Commander of Unit 8200, Israel’s elite military technology unit. Zafrir is credited with helping to establish the Israel Defense Force’s Cyber Command.
Index methodology
The security selection process begins with a universe of global stocks with market capitalizations above $300 million and average daily trading values greater than $1m. Firms that do not meet WisdomTree’s ESG standards (including UN Global Compact violators and companies with significant involvement in controversial weapons, tobacco, and thermal coal) are removed from the selection pool.
The remaining securities are then screened and assigned a ‘Focus Score’ based on their involvement across several development themes related to cybersecurity. Themes include privacy and digital trust, cloud security, shift-left security, smarter security, security of internet devices, perimeter-less world, and resilience and recovery. Companies are categorized as either ‘Broad Focus’ (involved in three or more themes) or ‘Narrow Focus’ (involved in only one or two themes). Companies that do not fall into either of these categories are excluded.
Alongside this, companies are assigned a ‘Growth Score’ based on their trailing three-year compound annual revenue growth rate (CAGR). A company is defined as ‘Growing Fast’ if it has exhibited a three-year CAGR above 20% or ‘Growing’ if it has exhibited a CAGR above 7% but below 20%. Companies that do meet either of these growth thresholds are excluded from the selection pool.
The securities that pass both screens form the constituents of the index.
These constituents are then weighted using a combination of their Focus and Growth Scores. Constituents defined as ‘Broad Focus’ and ‘Growing Fast’ receive a weight factor of 1.33, constituents defined as ‘Narrow Focus’ and ‘Growing’ receive a weight factor of 0.75, while all other constituents receive a weight factor of 1. Constituents are weighted to reflect their proportionate share of the weight factor while capping the aggregate weight of all stocks with weights above 5% at 37.5%.
The index is rebalanced on a semi-annual basis in March and September. Existing constituents are only removed if their CAGR falls below 5%.
As of 25 January, the index is dominated by stocks listed in the US which collectively make up 89.5% of the total weight. The next largest country exposure is Israel at 4.2%. All constituents hail from the information technology sector with the largest being Palo Alto Networks (6.9%), Rapid7 (6.5%), Fastly (5.9%), Crowdstrike (5.6%), Okta (5.4%), Fireeye (5.3%), Zscaler (5.1%), Cloudflare (4.9%), Tenable (4.9%), and Proofpoint (4.8%).
‘Differentiated and focused’
Alexis Marinof, Head of Europe, WisdomTree, said: “We’ve built a differentiated and focused strategy, which leverages Team8’s unrivalled expertise and knowledge of the cybersecurity industry…Our approach of developing thematic strategies with third-party sector experts continues to resonate with investors who expect thematic ETFs to be a true reflection of the sector they are seeking to track.”
Chris Gannatti, Head of Research, Europe, WisdomTree, added: “The WisdomTree Cybersecurity UCITS ETF focuses on the future of cybersecurity. Companies included in the portfolio are chosen for their high exposure to seven themes expected to drive the future growth of cybersecurity and must have proven revenue growth capability”.
Nadav Zafrir, Managing Partner at Team8, commented: “In 2020, a rapid pace of digital transformation dramatically accelerated, and trust in our digital infrastructure went from very important to absolutely critical. Amidst unprecedented challenges, remaining digitally connected fostered impressive levels of functionality driven by agility and, in many cases, kept the lights on. This apparent digital resilience mustn’t fool us. Maintaining trust in our infrastructure is achievable but requires we have our eyes wide open and an immense cyber defense effort. We have partnered with WisdomTree to highlight the trends and innovative solutions we believe will enable a secure and resilient digital future.”
The ETF comes with an expense ratio of 0.45%. Income is accumulated within the portfolio.
The fund enters an increasingly crowded market with several other ETFs in Europe already covering the cybersecurity theme. The most established of these is the $2.6bn L&G Cyber Security UCITS ETF (USPY LN) which costs 0.75%.
Newer competitors have looked to compete on price – the iShares Digital Security UCITS ETF (LOCK LN) and Rize Cybersecurity and Data Privacy UCITS ETF (CYBR LN) come with expense ratios of 0.40% and 0.45% respectively, while the First Trust Nasdaq UCITS Cybersecurity ETF (CIBR LN) costs 0.60%.