The unprecedented leak last month of millions of documents in Panama exposing the world’s rich and powerful offshore havens revealed one important issue facing investors – and it wasn’t how to avoid tax.
Cyber Security ETFs have potential following Panama Paper hack
The 11.5 million documents, covering elected officials to dictators and their associates, highlighted the value of investing for the long term in a growing cyber security market.
As a partner of Panamanian law firm Mossack Fonseca has revealed, the so-called “data dump” was the result of a hack into their computer systems.
Within 24 hours, the world was reeling. The prime minister of Iceland had resigned, President Obama had upped measures to prevent corporations avoiding tax overseas and the UK was demanding that UK Prime Minister David Cameron reveal whether he had a stake in his father’s offshore funds.
Clearly, the power and scale of cyber-attacks is growing year on year. Big companies like Sony, and big individuals like Donald Trump, have also fallen prey to these kind of attacks.
The wealth of riches that can be discovered by simply using a keyboard are making bank robberies with balaclavas seem outdated and the sophisticated attack on Hatton Garden diamond vault seem unnecessary.
That’s why ETFs tracking the cyber security market, mostly following US companies, have experienced such success, at least in the US. But in Europe it’s another story.
The ETFS ISE Cyber Security GO UCITS ETF (ticker USPY, or ISPY in sterling) listed in September 2015 and was the first such fund in Europe to enter this market. Costing 0.75 percent in annual fees, it has grown to around $32 million in assets – still evidently considered a niche product by investors.
It tracks an index of 33 US-based companies, such as Cisco Systems, VeriSign, FireEye and Splunk, and is physically replicated.
But after a choppy start to 2016 investors have not favoured growth stocks and have poured capital into value or safe haven assets instead. The ETF has fallen more than 7.1% this year to April in sterling terms and has suffered worse in US dollar terms at minus 11% over the same period.
Returns of ISPY/USPY are more positive over the last three months at around 2%/1.7% respectively, however, as investors put risk back on the table.
Overseas, investors can witness the potential size and liquidity the ETF could attract if conditions were right.
The London-based fund launch followed a similar product in the US in 2014, the PureFunds ISE Cyber Security ETF (ticker HACK), which peaked at around $1.1 billion in assets last September around the time of the Sony hack. It has since dipped, however, to around $714 million. Other providers like First Trust and Direxion have dipped a toe into this market, too.
And long term, the market potential has not gone away. Kris Monaco, head of ISE ETF Ventures said at the time of the London fund that there were 42.8 million cyber-attacks in 2014 alone, while global cyber-crime costs the economy hundreds of billions of dollars per year.
You could argue the Panama papers, which poked into every corner of the globe, is just the tip of the iceberg, and has re-ignited the debate on transparency and cyber security in Europe.
As a new ComRes survey has shown that 49% of people in the UK believe tax returns should be public, this issue of transparency is not going away anytime soon, and these ETFs could pick up again.