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Investing in megatrends: cyber security ETF case study

Investing in megatrends: cyber security ETF case study
  • Investment Insights
  • 5 minute read

Browsing through the weekly threat reports on the National Cyber Security Centre website makes for sobering reading1. Apart from headline grabbing issues, such as the Wannacry attack which hit the NHS in 2018 or the hoo-ha over Huawei’s restricted contribution to the UK’s proposed 5G network, there are innumerable others largely unknown to the public. Trickbot attacks on colleges, coronavirus phishing scams luring readers with “unreleased cures”, and criminals using a platform called Bitbucket to host malware – to name but a few threats. In 2019, the NCSC took down 172,335 phishing URLs2. We are all, it would seem, under near-constant attack.

Cyber security is now one of the defining issues of our age. Individuals, companies and nation-states are adapting to this new criminal reality, with a hefty price to pay if we cannot protect ourselves. Global cyber security spending will exceed $1 trillion between 2017 and 2021 as governments and companies attempt to keep data safe and secure3. It is now considered a top priority for company boards all over the world.

From an investment perspective, cyber security is a megatrend – an irreversible change which will alter our lives, perhaps of a similar magnitude to robotics and artificial intelligence (AI). In some senses it is a ‘higher order’ investment theme, given that any technological device or gadget running a piece of software is theoretically at risk. It is estimated that by 2025, there will be 100 billion internet-connected devices globally: kettles, cars, baby monitors4, CCTV cameras, burglar alarms – all opening up a new front on privacy, data theft and data security5. Whether state-sponsored attacks or a lone hacker, the stakes are high.

Fly on the wall

Consequently, to gain exposure to this megatrend in the Close Tactical Select Passive (TSP) Fund range, we invested in L&G’s Cyber Security UCITS ETF (Exchange Traded Fund). This ETF offers intra-day liquidity and full physical replication of the ISE Cyber Security Net Total Return Index – a benchmark of ~50 companies which meet its criteria for inclusion:

  • Minimum 10% revenue from cyber security
  • Minimum free-float adjusted market cap of $100m
  • 3-month average daily traded value (ADTV) of >$1m and 5-day rolling ADTV over last 60 days of >$750k

As a thematic play, this ETF delivers targeted exposure – with the median revenue from cyber security related activities of around 80% – and a minimal constituent overlap of around 1% with the S&P 500 Index and the MSCI World Index. It also invests across the market cap spectrum with approximately one third each in large-, mid- and small-cap companies, while accessing promising technologies as well as tried-and-tested cyber security methods from countries including the US, South Korea and Israel. With a Total Expense Ratio (TER) of 0.75%, accessing this specialist investment theme may be more expensive than the average ETF, but we anticipate it will be a worthwhile addition to the TSP fund range.

Lockdown

Technological innovations are opening up incredible opportunities for humankind to develop in unexpected ways. However, with greater dependency on technology comes increased vulnerability. Making our lives more secure will bear cost and demand expertise for us to adapt. As the arms race between criminals and security specialists accelerates, at Close Brothers Asset Management we are looking to identify the winners of this megatrend by investing in companies which aim to protect us.

Explore the Close Tactical Select Passive Funds

 

1https://www.ncsc.gov.uk/ Includes weekly threat reports and an annual review, with up-to-date information
2https://www.ncsc.gov.uk/ 2019 Annual Review
3Legal & General Investment Management: Cyber Security, L&G Cyber Security UCITS ETF
4https://www.bbc.co.uk/news/technology-51706631
5IHS Markit, quoted by Legal & General Investment Management: Cyber Security, L&G Cyber Security UCITS ETF

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