An Overview of the Cybersecurity Landscape and Ways to Invest in the Space

War zones are no longer confined to international borders; they have moved as close as our computer screens due to advancements in technology. In times of an increasingly digitized world, malicious cyber activity is a major threat. Cyber-attacks are carried out at all levels—individual, corporate, organization and country.

The need to guard against cyber threats is being felt more than ever before. One example is the issuance of a joint Cybersecurity Advisory (CSA), which was created by the cybersecurity authorities from United States, Australia, Canada, New Zealand and the United Kingdom in April 2022 in the backdrop of the Russia-Ukraine war.

Here’s an overview of the cybersecurity landscape and ways to invest in companies shielding against cyber threats.

Overview of the Cybersecurity Landscape

According to PwC’s Global Economic Crime and Fraud Survey 2022, cybercrime poses the biggest threat across organizations of all sizes. According to data released by the FBI, $43 billion was lost due to business email compromises (and email account compromises) during the period of June 2016 to December 2021.

Identity Theft Resource Center’s annual data breach report showed that 2021 was one of the worst on record for cybersecurity with the total number of data compromises up more than 68% compared to 2020. The new record number of data compromises was 23% over the previous all-time high set in 2017. According to the findings for Q1 2022, publicly reported data compromises totaled 404 through March 31, 2022, a 14% increase compared to Q1 2021.

According to a 2022 study by ThoughtLab, “Over the next two years, security executives expect an increase in attacks from social engineering and ransomware as nation-states and cybercriminals become more prolific.” 

Cybersecurity is a serious security issue at the national level, and countries are collaborating against these covert operations. Back in July 2021, the European Union, the United Kingdom and NATO joined the U.S. to expose and criticize China’s malicious cyber activities. According to the official statement, “Attributing with a high degree of confidence that malicious cyber actors affiliated with PRC’s Ministry of State Security conducted cyber espionage operations utilizing the zero-day vulnerabilities in Microsoft Exchange Server disclosed in early March 2021.” 

In November 2021, the defense ministers of Japan and Vietnam signed a memorandum on cybersecurity corporation. In May 2021, President Biden signed Executive Order 14028, “Improving the Nation’s Cybersecurity,” which aimed to modernize the approach in securing systems and data by adopting zero trust cybersecurity principles. Building on that, a memorandum was issued in January 2022.

A report by McAfee estimates the monetary loss from cybercrime at approximately $945 billion to the global economy. If the global spending on cybersecurity is added, then it is a whopping figure of $1 trillion in 2020. This figure was $600 million in 2018. The cybersecurity market is expected to reach $317.02.25 billion by 2027, registering a CAGR of 13.37% during 2022-2027.

Ways to Invest in Companies in the Cybersecurity Space

ETFs are a good way to invest in the cybersecurity space. Here’s a look at some popular ETFs.

First Trust Nasdaq Cybersecurity ETF (CIBR)

This ETF is among the oldest cybersecurity ETFs. Launched in 2015, the ETF tracks the Nasdaq CTA Cybersecurity Index comprising of 38 companies engaged in the cybersecurity segment of the technology and industrial sectors. The index includes companies primarily involved in the building, implementation and management of security protocols applied to private and public networks, computers and mobile devices to protect the integrity of data and network operations. The ETF has $4.97 billion as assets under management and an expense ratio of 0.60%. The ETF is down by 22% year-to-date (YTD). Around 47% of the asset allocation is towards the top ten holdings:

• CrowdStrike Holdings, Inc. (CRWD)
• Zscaler, Inc. (ZS)
• Palo Alto Networks, Inc. (PANW)
• Cisco Systems, Inc. (CSCO)
• Cloudflare, Inc. (NET)
• Okta, Inc. (OKTA)
• Booz Allen Hamilton Holdings Corporation (BAH)
• Thales S.A. (ADR) (THLLY)
• Check Point Software Technologies Ltd (CHKP)
• SentinelOne, Inc. (S)

Global X Cybersecurity ETF (BUG)

Launched in October 2019, this ETF offers exposure to a compact portfolio of around 30 companies that are positioned to benefit from the rising importance and increased adoption of cybersecurity technology. The fund tracks the Indxx Cybersecurity Index, which constitutes companies across geographies. The geographical allocation is dominated by the U.S. (70%) followed by Israel (13.2%), United Kingdom (8.6%), and Japan (6.3%). It has $1.07 billion as assets under management and an expense ratio of 0.50%. BUG is down by 19.52% YTD.

• Fortinet, Inc. (FTNT)
• Check Point Software Technologies Ltd. (CHKP)
• CrowdStrike Holdings, Inc. (CRWD)
• Palo Alto Networks, Inc. (PANW)
• Okta, Inc. (OKTA)
• Zscaler, Inc. (ZS)
• Qualys, Inc. (QLYS)
• SailPoint Technologies Holdings, Inc. (SAIL)
• Mandiant, Inc. (MNDT)
• Avast PLC (AVASF)

The iShares Cybersecurity and Tech ETF (IHAK) 

This ETF was launched in June 2019. It tracks the NYSE FactSet Global Cyber Security Index, which is composed of developed and emerging market companies involved in cybersecurity and technology. While close to 80% of its allocations are in the U.S., it offers exposure to companies in Israel (7.64%), Japan (4.24%), Taiwan (2.03%) and Canada (2.08%). Less than 2% holdings are in the U.K., Denmark and Germany. The fund has a corpus of $524.57 million and an expense ratio of 0.47%. YTD returns are currently in negative at 21.44%.

• CrowdStrike Holdings, Inc. (CRWD)
• Booz Allen Hamilton Holding Corporation (BAH)
• Zscaler, Inc. (ZS)
• Palo Alto Networks, Inc. (PANW)
• Okta, Inc. (OKTA)
• Fortinet, Inc. (FTNT)
• Citrix Systems, Inc. (CTXS)
• Check Point Software Technologies Ltd. (CHKP)
• Juniper Networks, Inc. (JNPR)
• Akamai Technologies, Inc. (AKAM)

WisdomTree Cyber Security Fund (WCBR) and Simplify Volt Cloud and Cybersecurity Disruption ETF (VCLO) are comparatively newer cybersecurity ETFs. In the leverage segment, ProShares Ultra Nasdaq Cybersecurity ETF (UCYB) is a 2X leverage ETF.

In addition, S&P Kensho Future Security Index (FITE) provides partial exposure to cybersecurity and covers ‘security theme’ in general. FITE captures companies involved in the future of security, which includes areas like cybersecurity, advanced border security, robotics, drones and drone technologies, space technology, wearable technologies and virtual or augmented reality activities.

Disclaimer: The author has no position in any stocks mentioned. Investors should consider the above information not as a de facto recommendation, but as an idea for further consideration. The report has been carefully prepared, and any exclusions or errors in it are totally unintentional. Scheme data, returns, and details based on factsheets and respective websites as July 1, 2022.

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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