The diverging fortunes of cybersecurity ETFs illustrate the need to do your homework

The diverging fortunes of cybersecurity ETFs illustrate the need to do your homework

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UK investors looking to play up the cybersecurity theme have a choice of options including two exchange-traded funds (ETFs) whose divergent fortunes help illustrate the very different results achieved by seemingly similar themed funds.

L&G Cyber ​​Security Units ETF (I SPY) and iShares Digital Security UcitsETF (SHLG) offer UK investors ways to access the trend. But a recent divergence in performance reminds us that such portfolios can be very different animals at times.

The L&G fund finished the first quarter relatively flat, the result of an extremely painful sell-off in January followed by a handful of rallies (and pullbacks) in February and March as the Ukraine crisis took hold. The iShares ETF has had a similar trajectory, but is down about 8 percent over the same period, leaving a clear gap between the two.

The exact cause of this difference is difficult to determine, but it appears that the L&G fund has enjoyed some steeper price increases when cybersecurity stocks have become fashionable. FE data suggests it made a nearly 14 percent gain between February 23 and March 2, a period that covers the first week of the Russian invasion. The L&G fund then pulled back slightly before rising 12 percent between March 14 and 25. The iShares ETF has risen strongly each period, but to a lesser extent.

This article was previously published by Investor Chroniclea title owned by the FT Group.

Portfolio concentration could explain some of this. On March 25, the L&G fund had a third of its assets in its 10 largest holdings, including VMware, Check Point Software Technologies, NortonLifeLock, Splunk and Akamai Technologies. The fund had 56 shares in total. iShares Digital Security, by contrast, had 18 percent of its top 10 and 120 total holdings.

The iShares fund also has a less specific remit: It targets companies exposed to “main structural drivers” that lead to a greater need for digital security. The L&G fund targets companies that are actively involved in providing cybersecurity technology and services, including those that develop relevant hardware and software, and provide secure digital consulting and services.

This is not the only divergence when it comes to popular topics. Ukraine has brought the need for renewable energy back into the spotlight, and clean energy ETFs have rebounded as a result. iShares Global Clean Energy Units ETF (INRG) and Invesco Global Clean Energy Units ETF (GCLX) have each increased by more than a quarter since February 23, the day before Russia launched its full-scale invasion of Ukraine. But the Invesco fund fell the hardest before the Ukraine crisis began, leaving it with a 4.7 percent paper loss in the first quarter, against a 4.4 percent gain for the iShares ETF.

This is all very short-term stuff, and it’s worth noting that the performance differences can certainly go the other way. While L&G Cyber ​​Security has outperformed rival iShares overall in recent years, the latter returned 17.4% in 2021, more than double the return delivered by the L&G ETF. But these differences illustrate that thematic funds can be just as idiosyncratic as active stock portfolios and need just as much, if not more, due diligence.

*Investors’ Chronicle is a 160-year publication of the Financial Times that offers an expert and independent view of the investment market. It offers educational features, investment commentary, practical advice, and personal finance coverage. For more information, visit investorscronica.es

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