An Update on the Growth of Cyber ETFs
In case you didn’t know, October is Cybersecurity Awareness Month. So today, we thought we’d update our data on the cybersecurity-related exchange-traded funds (ETFs).
Increasing importance of cybersecurity
It’s probably not surprising that cyber ETFs have seen strong growth, as data shows that cybercrime is increasing, and with that, losses from companies affected by breaches are also growing. Furthermore, other studies show that not only is the global cybersecurity market growing but also that a majority of chief information officers are prioritizing cybersecurity spending for this year, with 57% of CIOs surveyed citing cybersecurity improvements as a top reason for increases in tech budgets.
While strides have been made in cyber defense, with companies investing in emerging technologies such as AI and even quantum computing, high-profile attacks continue to be reported. According to Bloomberg, since just the beginning of 2020, there have been 92 corporate, government and non-profit organizations that have experienced a breach of over 1 million data records- these breaches have exposed more than 996 million records across many industries. This has certainly caught the attention of investors, with a large uptick in mentions of ransomware during earnings calls (Chart 1). This positions cyber as an industry with potential long-term growth and persistent recurring revenues.
Chart 1: Investors are increasingly worried about ransomware attacks
The alarming increase in the prevalence of data breaches hasn’t just caught the attention of Wall Street — it’s very much a salient issue in Washington as well. The White House has invested heavily in improving protections of both critical infrastructure and everyday Americans online, allotting more than $10 billion in cybersecurity funds in their $1.9 trillion COVID-19 stimulus recovery proposal and even investing in the aforementioned quantum technology.
Chart 2 provides additional details about the incidents with 1 million or more records breached over the last five years. We see that technology companies are most affected by attacks involving 1 million data breaches and 10 million data breaches, while other industries, such as retail, gaming and government, are also affected with less frequency.
Chart 2: Data breaches reach all industries
We count 30 cyber ETFs listed around the world
Cyber ETFs are just one of a growing group of increasingly popular “thematic ETFs.” Thematic ETFs give investors quick access to a diversified basket of stocks with exposure to a specific investment or economic theme.
We count 30 cyber ETFs around the world, with assets that top $12.9 billion.
Table 1: Globally listed cyber ETFs, ranked by assets
The largest cyber ETF, First Trust’s CIBR, which tracks an index jointly created by Nasdaq and the Consumer Technology Association (CTA) and trades almost $20 million per day, has almost $5 billion in assets. The second largest is the London Listed L&G Cyber ETF, which also tracks a Nasdaq index.
Cyber Index outperformance driven by breaches
Over the past eight years, we can see dozens of cyber breaches (green lines). The overall performance of CIBR reasonably tracked the performance of the broader market, with outperformance over time.
Chart 3: Over the past eight years, CIBR has outperformed the market
Perhaps not surprisingly, this study also found that Nasdaq’s Cyber Index outperforms the broader market when data breaches are disclosed, with stronger outperformance one and three months after data breach disclosures. Importantly, highlighted in this report is that there is often a significant delay between the breach itself and the disclosure of the breach- which is what one would expect to impact the performance of the ETFs.
Chart 4: Outperformance increases one and three months after data breach
U.S.-listed cyber ETF asset growth
Since the first cyber ETF launched in late 2014, by our count, there are at least seven U.S.-listed ETFs in the cyberspace now. The largest is the $4.8 billion First Trust NASDAQ Cybersecurity ETF (ticker CIBR), launched in July 2015. But with the increasing economic significance of breaches, newer ETFs have been established in recent years, with some already attracting significant assets. Over the whole eight years, U.S.-listed assets in the space have grown rapidly to $7.8 billion with a compound growth rate of 73.8% p.a. since the end of November 2014 (Chart 2).
Chart 5: Accumulated U.S.-listed cyber ETF AUM
Strong inflows have combined with the strong price growth during the pandemic, leading to assets more than tripling from the end of 2019 to the end of 2021. Many cyber stock prices have fallen along with the market in 2022, but the growth of cyber ETFs has proven to be more resilient than that of the market as a whole. While SPY is down 27.4% to the end of September, the U.S.-listed ETFs have only experienced a 21.2% decrease in AUM.
Thematic ETFs are different from a sector ETF
Sector and thematic ETFs have been around for a while. One thing that makes thematic ETFs different is that their holdings are often drawn from multiple sectors, market capitalizations and investment styles.
For example, Chart 3 shows that the subsector exposures of the two largest cybersecurity ETFs, CIBR and ISPY, are spread out across nine different subsectors. However, ISPY has much more concentration in Packaged Software and Internet Software, while CIBR has more concentration in Communications and Aerospace & Defense. Additionally, both ISPY and CIBR include non-U.S. companies, making up 19.8% and 7.65% of each ETF’s portfolio, respectively.
Chart 6: CIBR and ISPY ETF subsector exposure
Conclusion
Cyber ETFs are yet another way that investors can quickly, cheaply and easily gain access to a diversified portfolio of companies with exposure to just one theme.
As we round out Cybersecurity Awareness Month, it’s good to be aware of the growth and popularity of cyber ETFs that align with a threat that, sadly, seems unlikely to fade away quickly.
Phil Mackintosh
Nasdaq
Phil Mackintosh is Chief Economist and a Senior Vice President at Nasdaq. His team is responsible for a variety of projects and initiatives in the U.S. and Europe to improve market structure, encourage capital formation and enhance trading efficiency.
Read Phil's Bio