3 ETFs for Cybersecurity Awareness Month

October marks the start of Cybersecurity Awareness Month – the 19^th year in which the occasion will be marked – and it’s more relevant than ever.

Sure, it’s easy for investors to be consumed by short-term performances. There’s no denying growth and technology stocks – the applicable labels for cybersecurity names – are struggling this year and those woes could continue over the near-term because the Federal Reserve’s hands are tied when it comes to interest rates. Translation: More rate hikes are coming because inflation is high and showing no signs of relenting.

On a related note, the Nasdaq CTA Cybersecurity Index is in the red this year, but it’s beating the S&P 500 Information Technology Index by nearly 400 basis points. That’s just one example and one comparing less bad and bad, but it underscores the point that cybersecurity is a necessity and not something corporations and governments can skimp on.

Looked at differently, for investors that don’t want to stock pick, cybersecurity ETFs remain relevant long-term and this year’s macroeconomic headwinds could be creating rare valuation-related opportunity in this fund category. Here are some of the more compelling cybersecurity ETFs to consider.

First Trust Nasdaq Cybersecurity ETF (CIBR)

The First Trust Nasdaq Cybersecurity ETF (CIBR) is the oldest and largest ETF in this category and tracks the aforementioned Nasdaq CTA Cybersecurity Index. The $5.23 billion fund holds 37 stocks with a median market capitalization of $8.93 billion, indicating it’s not heavily reliant on large-cap names as a driver of returns.

For risk-tolerant, tactical investors willing to make valuation bets today, CIBR could reward that faith over the long haul because companies and governments are allocating more to cybersecurity spending. Amid an increasingly hostile cybercrime environment, they have no choice and that’s a plus for CIBR and its rivals.

“After numerous high-profile hacks, cybersecurity and data privacy remain a priority for government officials around the world," according to First Trust research. "In the U.S., the proposed federal budget for fiscal year 2022 includes $10.4 billion in new cybersecurity spending by the Department of Defense, and an additional $9.8 billion in funding to secure Federal civilian network."

Global X Cybersecurity ETF (BUG)

The Global X Cybersecurity ETF (BUG), which follows the Indxx Cybersecurity Index, isn’t just a “little brother” to CIBR. It’s a credible contender. BUG turns three years old next month and it’s already home to $1.16 billion in assets under management.

While an ETF’s assets under management tally is usually a superficial metric, in the case of BUG, the fund’s successful first three years confirm investor interest in cybersecurity ETFs as well as a willingness to embrace different approaches to this industry. Though its lineup is concentrated at 25 stocks, BUG isn’t constrained by geography or industry, indicating it’s a surprisingly broad approach to cybersecurity equities. That’s a relevant point because some countries outside the U.S., namely Israel, are prominent players on the global cybersecurity stage.

“The rapid ascent of Israel’s cybersecurity can be explained in part by the country’s focus on national defense and government efforts to promote the industry,” according to Global X. “In 2017, Israel founded a national center of cyber education, which now has 80 nationwide learning centers and 330 staff members. Between 2011 and 2021, the number of active cybersecurity companies in Israel multiplied, increasing from 162 to 459.”

Goldman Sachs Future Tech Leaders ETF (GTEK)

As its name implies, the Goldman Sachs Future Tech Leaders ETF (GTEK) is a diversified ETF focusing on disruptive technology stocks. It’s not a dedicated cybersecurity ETF, but several of its components are cybersecurity stocks.

Translation: GTEK has enough cybersecurity exposure to make it relevant in this conversation and it’s diverse enough to provide investors with avenues to capitalize on other mega-themes.

“We forecast the combined revenues of the three segments will grow from USD 386b in 2020 to USD 625bn in 2025, implying an average clip of 10% annually, higher than the mid- to high-single digits we forecast for the broader tech sector,” wrote UBS strategist Sundeep Gantori in a recent note to clients.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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