Investing in Cybersecurity: 2 ETFs to Consider

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While digitalization and use of sophisticated technologies are changing the world at a fast pace, there is a darker side to it. This is clearly reflected by the steep rise in the number of cybercrimes and frauds reported in recent years.

"Cybercrime has long passed beyond infancy and adolescence. Today's cybercriminals are as savvy and professional as the businesses they attack," states a PwC report. Not just individuals and businesses but even government agencies have to look to guard themselves beyond fortified buildings and undisclosed locations.

Here’s an overview of the cybersecurity space, and opportunities to invest via exchange traded funds (ETFs).

Cybercrime ranked among the most reported economic crimes worldwide in 2018. According to a survey, respondents believe that “Cybercrime was more than twice as likely than any other fraud to be identified as the most disruptive and serious economic crime expected to impact organizations in the next two years.”

Cyber-attacks can be done with various motives, to gain sensitive and secret information, cause business disruption, result in equipment and reputational damage, or inflict economic setback. Some of the commonly seen cyber-attacks are in the form of malware, web-based attacks, denial of service, ransomware, malicious intent, and so on. A report by Accenture breaks down cybercrime costs into four major consequences of attacks: business disruption, information loss, revenue loss and equipment damage. It is estimated that the total value at risk from cybercrime is $5.2 trillion over the next five years.

Increasingly frequent and precision-based cyber-attacks call for a stronger fortification against them. To combat against the growing incidence and sophistication of cyber-attacks, corporates and governments have increased the resources they're dedicating towards fighting cybercrime.

The FY 2020 President’s Budget includes $17.4 billion of budget authority for cybersecurity-related activities, 5% increase above the FY 2019 estimate. Due to the sensitive nature of some activities, this amount does not represent the entire cyber budget. Worldwide spending on information security products and services is projected to grow to $124 billion in 2019.

Here are two cybersecurity exchange traded funds that investors can consider:

Launched in 2015, the First Trust NASDAQ Cybersecurity ETF (CIBR) tracks the Nasdaq CTA Cybersecurity Index, which is a modified liquidity index comprising of companies engaged in the cybersecurity segment of the technology and industrial sectors. The ETF has close to $1 billion as assets under management, an expense ratio of 0.6% and has delivered 17.6% YTD returns. It provides exposure to around 40 stocks with a weightage based on liquidity and has 46% allocation to the top ten holdings, which include:

  • VMware
  • Palo Alto Networks
  • Cisco Systems
  • Broadcom
  • Okta
  • Proofpoint
  • Splunk
  • FireEye
  • Check Point Software Technologies
  • F5 Networks

Launched in June 2019, the iShares Cybersecurity and Tech ETF (IHAK) is the latest ETF within the cybersecurity space. The fund tracks the NYSE FactSet Global Cyber Security Index, which is composed of developed and emerging market companies involved in cybersecurity and technology, including cybersecurity hardware, software, products and services. While almost 83% of its allocation is towards U.S. domiciled companies, it provides some exposure to Israel (8.03%), Japan (4.77%), Taiwan (2.28%) and United Kingdom (1.55%). The fund has a corpus of $3.17 million and an expense ratio of 0.47%. The top ten holdings have a 44% allocation, and the list includes:

  • DocuSign
  • Symantec
  • Proofpoint
  • CACI International
  • Palo Alto Network
  • Trend Micro
  • Booz Allen Hamilton
  • Fortinet
  • Citrix Systems
  • Check Point Software Technologies

As we move to more connected and data-driven world, cybersecurity and cybercrime will continue to be an inseparable part of it. These ETFs provide a good investing opportunity to investors to be a part of the cybersecurity industry which continues to grow at a fast pace.

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. 

Fund information based on data from respective websites as on October 8, 2019.

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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Prableen Bajpai

Prableen Bajpai is the founder and managing partner at FinFix Research and Analytics; an enterprise engaged in financial research, wealth management, training and financial literacy. She started her career in 2007 with a wealth management firm, where she spent over six years as the research head. Prableen is a Chartered Financial Analyst (CFA, ICFAI) and holds a Bachelor (Honours) and Masters in Economics with a major in Econometrics and Macroeconomics.

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