Investing in Cybersecurity: An Overview of the Industry and ETFs to Consider
An invisible enemy is the hardest to combat. This enemy doesn’t fight at the borders; it directly infiltrates the digitized world. Cybersecurity has shifted from being an IT problem to a persistent global concern affecting individuals, corporates, organizations and nations. Amid rising cyberattacks, the need to strengthen cybersecurity has risen.
Here’s an overview of the cybersecurity landscape and exchange traded funds (ETFs) that provides investors exposure to cybersecurity companies.
Cyberattacks are emerging as the top threat, according to recent reports. In a 2023 Gallup poll, it was found that “Cyberterrorism, the use of computers to cause disruption or fear in society” was the most critical threat. A 2022 Pew Research Center survey also found that, “Many U.S. adults describe cyberattacks from other countries (71%) and the spread of misinformation online (70%) as major threats to the U.S.” The annual data breach report by Identity Theft Resource Center showed the number of data compromises in the U.S. in 2022 was 1,802.
As per PwC’s Global Economic Crime and Fraud Survey 2022, cybercrime poses the biggest threat across organizations of all sizes. While FBI data revealed that $50 billion was lost due to business email compromises (BEC) and email account compromises during the period between October 2013 and December 2022. According to the FBI’s note, “The BEC scam has continued to evolve, targeting small local businesses to larger corporations, and personal transactions. Between December 2021 and December 2022, there was a 17% increase in identified global exposed losses.”
Cyberattack is a serious security concern at the national level. In May 2023, the U.S. and international cybersecurity authorities issued a joint Cybersecurity Advisory (CSA) to highlight “the activity of interest associated with a People’s Republic of China (PRC) state-sponsored cyber actor, also known as Volt Typhoon.” Volt Typhoon typically focuses on espionage and information gathering as mentioned in a Microsoft report. Back in April 2022, a CSA was issued by the cybersecurity authorities of the U.S, Australia, Canada, New Zealand, and the UK in the backdrop of the Russia-Ukraine war. According to Gartner, “Attacks on organizations in critical infrastructure sectors rose from less than 10 in 2013 to almost 400 in 2020, a 3,900% increase.”
The increasing number of cyberattacks worldwide has caused damage worth trillions of dollars of every year. To combat the rise of cyberattacks, the worldwide spending on cybersecurity continues to increase. IDC projects the worldwide spending on security solutions and services to be $219 billion in 2023, an increase of 12.1% compared to 2022 and is expected to reach $300 billion by 2026. While billions are being spent to fight the cyber onslaught, McKinsey believes that there is a huge gap between the current market size and the addressable market size.
According to McKinsey, there is a $2 trillion market opportunity for cybersecurity technology and service providers and the “cybersecurity industry has a chance to step up and seize the opportunity.”
Investors looking to invest in leading companies in the cybersecurity space can explore the following ETFs.
1. The First Trust NASDAQ CEA Cybersecurity ETF (CIBR) is among the oldest cybersecurity ETFs. Launched in 2015, the ETF tracks the Nasdaq CTA Cybersecurity Index, which is a modified liquidity index comprising of companies engaged in the cybersecurity space. The ETF has close to $4.8 billion as assets under management, and an expense ratio of 0.60%. It has delivered 13.48% year-to-date returns. It provides exposure to around 33 stocks with around 47.44% allocation to the top ten holdings, which include:
- Palo Alto Networks, Inc. (PANW)
- Infosys Limited ADR (INFY)
- Fortinet, Inc. (FTNT)
- Broadcom, Inc. (AVGO)
- Cisco Systems, Inc. (CSCO)
- Splunk, Inc. (SPLK)
- Booz Allen Hamilton Holdings Corporation (BAH)
- CrowdStrike Holdings, Inc. (CRWD)
- Thales S.A. (ADR) (THLLY)
- Zscaler, Inc. (ZS)
2. The iShares Cybersecurity and Tech ETF (IHAK) was launched in June 2019 to provide exposure to companies at the forefront of innovation in cybersecurity. It tracks the NYSE FactSet Global Cyber Security Index, which is composed of developed and emerging market companies involved in cybersecurity and technology. While 72.68% of its allocations are in the U.S., it offers exposure to companies in Israel (9.27%), Taiwan (5.64%), Japan (3.82%), Germany (2.21%) and Canada (2.07%). The fund holds around 1.5% in Denmark and the United Kingdom. The fund has a corpus of $591.52 million and an expense ratio of 0.47%.
- Accton Technology Corporation
- Qualys, Inc. (QLYS)
- Booz Allen Hamilton Holdings Corporation (BAH)
- CrowdStrike Holdings, Inc. (CRWD)
- Palo Alto Networks, Inc. (PANW)
- Akamai Technologies, Inc. (AKAM)
- Zscaler, Inc. (ZS)
- Check Point Software Technologies Limited (CHKP)
- Science Applications International Corporation (SAIC)
- CACI International, Inc. (CACI)
3. Launched in October 2019, the Global X Cybersecurity ETF (BUG) has recently turned 4-years-old. BUG offers exposure to a compact portfolio of 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 allocation towards the U.S. is at 68.4% followed by 14.4% in Israel. United Kingdom, Japan, Canada and South Korea together hold 17.3%. It has $557.17 million as assets under management and an expense ratio of 0.51%. The top ten holdings add up to 62.83%.
- Zscaler, Inc. (ZS)
- CrowdStrike Holdings, Inc. (CRWD)
- Palo Alto Networks, Inc. (PANW)
- Check Point Software Technologies Limited (CHKP)
- Qualys, Inc. (QLYS)
- Varonis Systems, Inc. (VRNS)
- CyberArk Software Limited (CYBR)
- Okta, Inc. (OKTA)
- Fortinet, Inc. (FTNT)
- Tenable Holdings, Inc. (TENB)
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 on October 26, 2023 and hence subject to change with the market movement. Links to the data added in the report are given.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Prableen Bajpai
Prableen Bajpai is the founder of FinFix Research and Analytics which is an all women financial research and wealth management firm. She holds a bachelor (honours) and master’s degree in economics with a major in econometrics and macroeconomics. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and a CFP®.
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