ETF 101: Under the Hood of the L&G Cyber Security UCITS ETF (USPY)

Earlier in July, we explored the global cybersecurity industry, highlighting both the surge in mergers and acquisitions (M&A) activity and the increasing investment in cybersecurity products and services by companies worldwide. We also noted the growing frequency and cost of security breaches.

Among the ETFs we mentioned for targeting this sector was the L&G Cyber Security UCITS ETF (USPY). While our previous article provided a brief overview, there’s a need for more detailed insight, especially for those who are new to thematic investing.

Here’s some more information about USPY as you consider it as a potential investment in the cybersecurity industry.

USPY: the basics

Understanding USPY starts with how the ETF is structured.  This index-tracking ETF is a systematically implemented open-ended fund that tracks a benchmark, the ISE Cyber Security UCITS Index Net TR USD (Net TR stands for "total return", that is with net dividends reinvested).

ETFs like this one typically track their benchmarks using one of two common methods: synthetic or physical replication. This refers to how they build their portfolios.

In synthetic replication, the ETF does not directly own the underlying assets but uses derivatives such as swaps, futures and/or options to mimic the performance of the index. In contrast, physical replication, which USPY employs, means the ETF actually holds the stocks of companies in the index it tracks.

Specifically, USPY is a ‘full replication’ ETF, meaning it holds all the securities in the index in their exact proportions rather than just sampling some.

The ETF trades in US dollars but is domiciled in Ireland as a UCITS ETF. UCITS stands for ‘Undertakings for Collective Investment in Transferable Securities’, a regulatory framework in the European Union that allows for the sale of cross-Europe mutual funds.

As a result, despite being domiciled in Ireland, USPY is available for purchase by investors in several countries, including Austria, Denmark, Finland, France, Germany, Ireland, Italy, Liechtenstein, Luxembourg, Netherlands, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

If you prefer to transact in a currency other than USD, USPY has several variants traded on other exchanges and denominated differently:

• London Stock Exchange, GBP: ISPY
• London Stock Exchange, USD: USPY
• Borsa Italiana, EUR: ISPY
• Deutsche Börse Xetra, EUR: USPY
• Euronext Amsterdam, EUR: ISPY
• SIX Swiss Exchange, CHF: ISPY
• Bolsa Mexicana, MXN: USPY

USPY charges a Total Expense Ratio (TER) of 0.69%, which includes all the annual fees and expenses of the fund. For example, if you invest $10,000 in USPY, you can expect to pay approximately $69 annually, though this fee is not charged upfront but rather deducted from the ETF’s overall performance.

Finally, USPY is a large and popular ETF, having launched in September 2015. It currently has $2.4 billion in assets under management (AUM). A high AUM generally indicates investor confidence and provides greater liquidity, making it easier to buy and sell shares in the ETF.

USPY: methodology

USPY aims to track its benchmark, the ISE Cyber Security UCITS Index Net TR USD, to select and weight its portfolio. This benchmark employs a multi-step process to determine its holdings, beginning with defining its selection universe, which consists of two main categories:

1. Infrastructure Providers: Companies that develop the hardware and software necessary for cybersecurity and network security applications.
2. Service Providers: This category includes consultants, Security as a Service (SaaS) providers, and other cybersecurity service companies.

The classification is determined by a team of cybersecurity research experts at Nasdaq, constituting a Classification Committee. This proprietary classification has allowed the final portfolio to have a low overlap with traditional indices over the years, since the 2015 fund launch.

After defining the universe, the index applies specific criteria to decide which companies make the cut. These criteria include size, measured by market capitalisation (calculated as share price multiplied by the number of shares outstanding) and liquidity, assessed through daily trading volume.

The index then weights these categories based on the aggregate market capitalisation of the underlying holdings. However, within each of the two segments—Infrastructure Providers and Service Providers—companies are equal-weighted. A weight adjustment is then applied according to the liquidity profile and share ownership in those holdings.

USPY: current holdings

As of 31 July, USPY held a portfolio of 36 companies, with the top 10 holdings accounting for 58.9%, while the remaining 26 companies make up the other 41.1%.

As expected, the portfolio is dominated by information technology stocks at 94.6%, with some smaller allocations to communication services and industrials.

Here’s a look at the top five holdings of the ETF and their respective roles in cybersecurity:

1. Cisco Systems*: A global leader in networking technology, Cisco provides a wide range of cybersecurity solutions, including firewalls, intrusion prevention systems and threat detection software, helping to secure enterprise networks.
2. Broadcom*: This semiconductor giant is involved in cybersecurity through its Symantec division, offering software solutions that protect data and systems from threats.
3. Fortinet*: Specialises in network security, particularly known for its next-generation firewalls and unified threat management systems, which protect against a broad range of cyber threats.
4. Palo Alto Networks*: A leading provider of advanced firewalls and cybersecurity platforms, Palo Alto Networks offers solutions that prevent cyber breaches and protect critical data across networks.
5. Cloudflare*: Known for its content delivery network (CDN) services, Cloudflare also provides cybersecurity solutions that protect websites and online services from distributed denial-of-service (DDoS) attacks and other cyber threats.

* For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

For Professional Clients only. Capital at risk.

This is a marketing communication. Please refer to the prospectus of the fund and the Key Information Document (KID) or UK Key Investor Information Document (KIID) (as applicable) before making any final investment decisions.

Key Risk Warnings

The value of an investment and any income taken from it is not guaranteed and can go down as well as up, and the investor may get back less than the original amount invested.

Past performance is not a guide to future performance.

The Fund invests in technology companies whose products may face rapid obsolescence due to technological developments and frequent new product introduction. Such companies may face unpredictable changes in growth rates, competition for the services of qualified personnel and intense domestic and international competition, including competition from foreign competitors with lower production costs. Such companies are heavily dependent on patent and intellectual property rights. The loss or impairment of these rights may adversely affect the profitability of these companies.

Additionally, companies in the cyber security field may be the target of cyber attacks themselves, which, if successful, could significantly or permanently damage a company’s reputation, financial condition and ability to conduct business in the future.

The Fund may have underlying investments that are valued in currencies that are different from USD, in which case exchange rate fluctuations will impact the value of your investment. In addition, the return in the currency of this share class may be different to the return in your own currency. Third party service providers (such as counterparties entering into FDIs with the Fund or the Company’s depositary) may go bankrupt and fail to pay money due to the Fund or return property belonging to the Fund.

If the Index provider stops calculating the Index or if the Fund’s license to track the Index is terminated, the Fund may have to be closed.

It may not always be possible to buy and sell Shares on a stock exchange or at prices closely reflecting the NAV.

There is no capital guarantee or protection on the value of the Fund. Investors can lose all the capital invested in the Fund.

Please refer to the “Risk Factors” section of the Company’s Prospectus and the Fund Supplement. 

Important Information

The information in this document is for professional investors and their advisers only. This document is for information purposes only and we are not soliciting any action based on it. The information in this document is not an offer or recommendation to buy or sell securities or pursue a particular investment strategy and it does not constitute investment, legal or tax advice. Any investment decisions taken by you should be based on your own analysis and judgment (and/or that of your professional advisers) and not in reliance on us or the Information.

This document does not explain all of the risks involved in investing in the fund. No decision to invest in the fund should be made without first reviewing the prospectus, key investor information document and latest report and accounts for the fund, which can be obtained from https://fundcentres.lgim.com/.

This document has been prepared by Legal & General Investment Management Limited and/or their affiliates (‘Legal & General’, ‘we’ or ‘us’). The information in this document is the property and/or confidential information of Legal & General and may not be reproduced in whole or in part or distributed or disclosed by you to any other person without the prior written consent of Legal & General. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation.

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This financial promotion is issued by Legal & General Investment Management Limited.

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Important information

The information in this document is for professional investors and their advisers only. This document is for information purposes only and we are not soliciting any action based on it. The information in this document is not an offer or recommendation to buy or sell securities or pursue a particular investment strategy and it does not constitute investment, legal or tax advice. Any investment decisions taken by you should be based on your own analysis and judgment (and/or that of your professional advisors) and not in reliance on us or the Information.

A summary in English of investor rights associated with an investment in the fund is available from www.lgim.com/investor_rights.

The risks associated with each fund or investment strategy are set out in the key investor information document and prospectus or investment management agreement (as applicable). These documents should be reviewed before making any investment decisions. A copy of the English version of the prospectus and the key investor information document for each fund is available at www.lgim.com and may also be obtained from your Client Relationship Manager. Where required under national rules, the key investor information document will also be available in the local language of the relevant EEA Member State.

A decision may be taken at any time to terminate the arrangements made for the marketing of the fund in any EEA Member State in which it is currently marketed. In such circumstances, shareholders in the affected EEA Member State will be notified of this decision and will be provided with the opportunity to redeem their shareholding in the fund free of any charges or deductions for at least 30 working days from the date of such notification.

Information on sustainability-related aspects on the funds is available on https://fundcentres.lgim.com/. The decision to invest in the funds should take into account all the characteristics or objectives of the fund as described in its prospectus and in the key investor information document relating to the fund.

This document has been prepared by Legal & General Investment Management Limited and/or their affiliates (‘Legal & General’, ‘we’ or ‘us’). The information in this document is the property and/or confidential information of Legal & General and may not be reproduced in whole or in part or distributed or disclosed by you to any other person without the prior written consent of Legal & General. Not for distribution to any person resident in any jurisdiction where such distribution would be contrary to local law or regulation.

No party shall have any right of action against Legal & General in relation to the accuracy or completeness of the information in this document. The information and views expressed in this document are believed to be accurate and complete as at the date of publication, but they should not be relied upon and may be subject to change without notice. We are under no obligation to update or amend the information in this document. Where this document contains third party data, we cannot guarantee the accuracy, completeness or reliability of such data and we accept no responsibility or liability whatsoever in respect of such data.

This financial promotion is issued by Legal & General Investment Management Limited.

In the European Economic Area, this document is issued by LGIM Managers (Europe) Limited, authorised and regulated by the Central Bank of Ireland as a UCITS management company (pursuant to European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations, 2011 (as amended) and as an alternative investment fund manager (pursuant to the European Union (Alternative Investment Fund Managers) Regulations 2013 (as amended). LGIM Managers (Europe) Limited’s registered office is at 70 Sir John Rogerson’s Quay, Dublin, 2, Ireland and it is registered with the Irish Companies Registration Office under company no. 609677.

For investors in Switzerland only: This information provided herein does not constitute an offer of the Funds in Switzerland pursuant to the Swiss Federal Law on Financial Services ("FinSA") and its implementing ordinance. This is solely an advertisement pursuant to FinSA and its implementing ordinance for the Funds. Swiss Representative and Paying Agent: State Street Bank International GmbH Munich, Zurich Branch Beethovenstraβe 19, 8007 Zurich, Switzerland. Availability of Documents: The prospectus, Key Information Documents (KIDs), the instruments of incorporation, annual report and subsequent semi-annual report and additional relevant documentation of the above-mentioned collective investment schemes are available free of charge from the Swiss representative and from Legal & General Investment Management Limited, One Coleman Street, London, EC2R 5AA, GB.

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