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Earlier this month Symantec Corp., possibly the best-known name in cybersecurity, completed the sale of its Enterprise cybersecurity business, and the rights to the Symantec name, to Broadcom Inc. Symantec Corp., which makes Norton Antivirus, kept its consumer business but has rebranded as part of the deal, changing its name to NortonLifeLock Inc. and its ticker from SYMC to NLOK on the Nasdaq exchange.
The completion of this acquisition reminded me of an incident last year, which provides a fantastic example of the diversification benefits of ETFs when it comes to thematic investing.
On Thursday, 10 May 2018, Symantec Corp. disclosed they were conducting a whistle-blower investigation after a former employee raised concerns around some of the company’s accounting practices. The allegation prompted the company to notify the U.S. Securities and Exchange Commission (SEC) and hire independent counsel to assist an inquiry.
On announcement of the investigation, Symantec stated,
“The investigation is in its early stages and the Company cannot predict the duration or outcome of the investigation. The Company’s financial results and guidance may be subject to change based on the outcome of the Audit Committee investigation,” and “It is unlikely that the investigation will be completed in time for the Company to file its annual report for the fiscal year ended March 30, 2018 in a timely manner.”
Following the announcement, nine equity analysts downgraded the stock and on the subsequent trading day, Symantec shares lost almost a third of their value.
Following a four-month probe, on 24 September 2018, Symantec announced it would not restate previous financial results except for a specific US$13 million transaction.
Clearly, different investors have different reasons for investing in a given company. Some may have invested in Symantec for stock-specific reasons, while other may have invested because they wanted exposure to the cybersecurity sector, and chose Symantec on the grounds that it is one of the leading companies in the sector.
For this second group of investors, the volatility that occurred in their investment during this period would most likely have been unwelcome, as it was a result of issues specific to Symantec, and unrelated to the fortunes of the sector as a whole.
For investors looking for exposure to a sector, a thematic, or a region, we believe the diversified exposure an ETF offers is more appropriate, as it significantly reduces stock-specific risk.
The BetaShares Global Cybersecurity ETF (ASX: HACK) provides a simple and cost-effective way to access a diversified portfolio of cybersecurity companies.
Prior to this event, on 30 April 2018, Symantec Corp was HACK’s third largest holding, representing over 6% of the portfolio. Despite the individual stock price falling -33.10% in one day, HACK only suffered a fraction of the decline, with a daily fall of 3.14%1.
As mentioned at the start of this article, Symantec is possibly the most widely known name in cybersecurity, and a large proportion of investors looking to invest in the thematic may have chosen Symantec if they were unaware of alternative options.
The risk of picking a single stock to implement a view on a sector/theme is that the investor may get the overall cybersecurity thematic right, but events such as the above can damage the strategy.
If an Australian investor had invested in either HACK or Symantec (NortonLifeLock) since HACK’s inception on 30 August 2016, they would have had the following returns:
|Cumulative returns||Annualised returns|
Source: Bloomberg. Data in AUD as at 21 November 2019. Past performance is not indicative of future performance.
As ETFs grow in popularity, the range of funds available in Australia is also increasing, allowing investors to invest in themes they have conviction in, without overexposing themselves to stock-specific risks.
BetaShares has a large range of ETFs across sectors and thematics, both internationally and within Australia. For more information and to see the full range visit: https://www.betashares.com.au/fund-list/fund-overview/
More information of the BetaShares Global Cybersecurity Fund (ASX: HACK) can be found at: https://www.betashares.com.au/fund/global-cybersecurity-etf/
1. Source: Bloomberg
Note: Investment risks associated with an investment in HACK include market risk, cybersecurity companies risk, concentration risk and currency risk. Please refer to the Product Disclosure Statement for more information.