Fast Forward To Futuristic ETFs

Flying cars, self-drying clothes and dehydrated pizzas – just a few of the gizmos that greeted Marty McFly in Back to the Future II when he time travelled to 21 October 2015. Sadly, none of these exist yet but the film was right about one thing: nowadays, technology rules. Robotics and automation technology have infiltrated our everyday lives and, with the advent of the internet, an increased need for cyber security.

Cyber attacks on blue-chip names like Sony Pictures, JP Morgan Chase and Carphone Warehouse have highlighted the need for robust cyber security, a boon for companies that provide these services. Now investors want exposure to these rising stocks in an low cost and transparent wrapper – ETFs.

I Spy With My Little Eye

Less than a year ago, a little-known U.S. ETF provider launched the PureFunds ISE Cyber Security ETF (HACK) – just days before Sony Pictures was dramatically (and very publically) hacked. U.S. investors flocked to HACK, pumping in over a billion dollars since its inception. This summer, U.S. provider First Trust followed suit with the First Trust NASDAQ CEA Cybersecurity ETF (CIBR), which has already attracted around $85 million in assets.

Now ETF Securities wants to replicate the same success in Europe with its recently launched ETFS ISE Cyber Security GO UCITS ETF, with the ticker ISPY. Listed on the London Stock Exchange (LSE) on September 28, its total expense ratio is well above mainstream equity indexes at 0.75 percent per year. Nonetheless it is attracting interest from the likes of retail investors, advisers and private wealth managers, according to Howie Li, co-head of ETF platform Canvas at ETF Securities.

"We started building [this] about six months ago, obviously we have been watching what happened in the U.S. Cyber security is a big theme," said Li.

The threat of cyber-attacks is a hot topic, and certainly fear initially captures investors' attention, said Li. But soon investors come to realise that cyber security is of such importance, that the growth story of companies providing these services represent an investment opportunity.

Returns - Sky-High Or Lacklustre?

But will these ETFs give investors a juicy return? PureFunds' HACK comprises a mix of well-known names and rising stars, such as VeriSign, Cisco Systems, FireEye and Splunk. The fund initially performed well, but year-to-date returns are trailing at -1.52 percent, according to data from Bloomberg. The volatile summer was a factor, said Andrew Chanin, CEO of PureFunds.

The First Trust NASDAQ CEA Cybersecurity ETF is also down around 10 percent since inception, which is no surprise given the "downdrafts in markets", said Ryan Issakainen, ETF strategist at First Trust. Cyber security firms are, in many cases, fairly new and are classified as "higher beta" – as such they are more vulnerable to market moves. When markets go up, they rise sharply, but when markets fall they can slump.

"These are not large stalwart tech names that everyone is familiar with," said Issakainen.

Nevertheless, cyber security is far from a passing fad. Technology research firm Gartner predicts that worldwide spending on information security will reach $76.9 billion this year.

Robots Run The World

ETF Securities launched its cyber offering on the back of its ROBO-STOX Global Robotics and Automation GO UCITS ETF (ROBO LN) which launched last October, the first European ETF to give investors exposure to the global robotics and automation sector. It also has a relatively high annual cost of 0.95 percent, suggesting a lack of competition in the market.

"Both funds are part of the same initiative that we feel quite strongly about. For us, both [ETFs] are very much a long-term focus for ETF Securities. Technology is a sector that a lot of equity investors are often excited about [with] potential growth opportunities," said Li.

Broad-based technology ETFs tend to cover large cap corporates, but miss out on the growth story offered by smaller companies in the indices tracked by ROBO LN and ISPY LN.

Gillian Walmsley, head of fixed income and listed products at the LSE, said that these ETFs are a response to the "ever growing investor demand for more tailored instruments”.

ROBO Global Partners created the first benchmark index to track the global robotics and automation market, and worked with ETF Securities to launch ROBO LN. Chief executive officer Richard Lightbound said that the robotics industry has grown significantly since it first developed in the sixties, to cut across numerous industries including consumer electronics, logistics, healthcare, agriculture and 3D printing.

Even fashion house Louis Vuitton is singing the praises of automation technology at its current London exhibition – lasers meticulously cut the leather used to make its designer bags, a process that was previously done by hand for generations, to ensure as little wastage as possible.

The robotics industry may be here to stay, but Europe's robotics ETF has taken a knock this year – year-to-date returns are down almost 11 percent.

"Recent events demonstrated it's not an immune sector, it will be impacted by economic trends. You've got to take a medium to long-term view," explained Lightbound.

What Do Advisers Think?

Allan Lane, managing partner of Twenty20 Investments, is intrigued by this growing trend. Twenty20 works with its clients to construct ETF managed portfolios tailored to their requirements; Lane recently took a call from a European private bank that is interested in these sectors.

Lane said cyber security and robotics would often be seen in the same kind of category as higher risk AIM stocks, with the stellar performers always being small and micro-caps.

“When you couple that with hottest topic of day, it's something potentially explosive,” he said. “I would quite happily put [these ETFs] in the portfolio today."

But investors need to take a good look at the underlying constituents of specialist indices such as ROBO-STOX, which includes names like French drone company, Parrot, which they might not feel comfortable investing in.

After all, socially responsible investing is growing in popularity and will become increasingly important, said Lane. SRI-conscious investors could prove a hurdle for tech-focused ETFs to overcome in order to become more mainstream. Figures published last year by the Forum for Sustainable and Responsible Investment estimated that $6.57 trillion of assets in the U.S. alone track SRI strategies.