When ETF Securities launched the ETFS ISE Cyber Security GO UCITS ETF (`ISPY’) in September 2015 it was the first ever cybersecurity ETF in Europe. It was also the latest example of ETF Securities’ commitment to delivering innovative products. ISPY is a smart beta ETF that tracks the ISE Cyber Security UCITS Index Total Net Return using a rules-based methodology developed by ISE ETF Ventures in partnership with ETF Securities.
For inclusion in the index, each cybersecurity company must have a minimum USD100million market cap with an average daily turnover of at least USD1million. The `smart’ element involves using a growth factor to equally weight the index with a diversified range of global cybersecurity companies across industry sectors. Small-cap and mid-cap companies make up approximately 75 per cent of the index.
“One of the themes that we’ve been working on over the last few years is disruptive technology,” says Rahul Bhushan (pictured), Product Specialist at ETF Securities. “We’ve seen strong interest in ISPY since launch. ISE, our index provider, launched a similar product in the US in 2014 which at its peak had assets of USD1.4billion, and we wanted to be the first in Europe to provide similar exposure.”
“In early 2016, volatility that emanated from the global equity market spilled over into the cybersecurity sector, which led the index to post negative performance. We cautioned investors not to fall into the trap of thinking that the cybersecurity sector was weak. Our view is that this sector has significant growth potential,” adds Aneeka Gupta, Equity & Commodities Strategist, ETF Securities.
If one looks at the statistics, they support Gupta’s outlook. The number of cybersecurity firms is estimated to grow by 70 per cent between now and 2020 according to PwC research. Also, it is estimated that the cybersecurity sector will grow from USD107 billion to USD170 billion over the next five years.*
“When we present ISPY to clients we want them to think about opportunity in 4 different ways. The first is event-driven capital appreciation. High profile cybersecurity attacks may cause short-term volatility in the markets. The ETF can be an effective vehicle for investors to benefit from the performance of cybersecurity stocks when high profile attacks occur,” explains Bhushan.
The second is long-term capital appreciation. The companies in the index are by and large small- and mid-cap companies with strong growth prospects.
“Third, ISPY offers high-growth diversification of existing investments. The majority of cybersecurity companies held by ISPY are not held by broad-based technology funds. As such ISPY may help investors in broad-based technology funds increase their overall portfolio diversification,” says Bhushan. “Finally, this is a burgeoning sector with high probability of M&A. When there is any offer made on constituents this may lead to a spike in the price and benefit the index. We saw this, for example, when FireEye acquired Mandiant Corp for USD1 billion in January 2014, causing its share price to climb by more than 30 per cent. Also, when Cisco Systems acquired Sourcefire for USD2.5 billion in October 2013, Sourcefire’s share price climbed 28 per cent.”
With cybersecurity now regarded as an integral part of the technology sector, this appears to be a good time for investors to build exposure into their portfolios, and benefit from the potential opportunity that cybersecurity presents.
*Source: Marketsandmarkets.com, Cyber Security Market By Solution – Global Forecast to 2020
