The brand new First Trust Nasdaq CEA Cybersecurity ETF (CIBR) is hoping to capitalize on the hot theme of cybersecurity, and challenge the hugely popular PureFunds ISE Cyber Security ETF (HACK | C-23) by relying on First Trust’s stature in the ETF space. The firm has also built a cheaper-than-HACK portfolio.
HACK, which until this week was a one-of-a-kind ETF, has been hugely popular with investors, gathering more than $1.2 billion in assets since it came to market last November. The seven-month history of the fund suggests that with every news of data breaches and cybersecurity threats around the globe, demand for HACK rises.
Banking On Name Recognition
But now, First Trust, the sixth-largest ETF issuer—with $43.4 billion in assets—wants a piece of that action. While overcoming first-to-market advantage such as the one HACK enjoys isn’t easy, First Trust is counting on its more recognizable name brand and more established presence in the ETF space to help its new fund, CIBR, get traction.
Beyond that, First Trust is also hoping that a 20 percent cheaper expense ratio—plus a portfolio comprising more liquid underlying holdings—will help attract investor dollars to its second-to-market strategy.
At the end of the day, CIBR and HACK aren’t all that different in the exposure they offer, but there are three key distinctions worth noting:
Focus On Liquidity
CIBR is keen on emphasizing liquidity—something that isn’t always a given in a universe of companies that are often small and young. As HACK grows, lack of underlying liquidity in some of its holdings could become a problem if the ETF owns more and more of a company’s outstanding float.
CIBR requires its stocks have a minimum three-month average daily dollar trading volume of $1 million, according to First Trust. They also have to have a minimum free float of 20 percent and market capitalization of at least $250 million.
By comparison, companies included in HACK must have a minimum market cap of $100 million. The index methodology doesn’t specify a liquidity threshold, although HACK’s index provider—ISE—often uses the same $1 million figure as a parameter.
What’s key here is that ISE’s semi-qualitative/semi-quantitative approach to liquidity does not involve establishing a cutoff when it comes to a company’s required free float.
To investors, that distinction means HACK is more likely to own smaller, up-and-coming companies that could be on the leading edge of technology breakthroughs, but that have yet to establish much of a track record. It’s pure exposure to anti-hacker stocks. Average daily trading does play a role in the weighting of each security, according to ISE.