While Cybersecurity Awareness Month recently concluded, the efforts to combat cybercrime continue every day, and for investors, this presents a critical opportunity to invest in this industry that is poised for future growth.
Types of Cyber Threats
There are several common cyber threats and crimes that companies need to stay vigilant about, according to the FBI. Those include:
- Business email compromise (BEC) scams that exploit the fact that so many of us rely on email to conduct business.
- Ransomware, a type of malicious software that prevents you from accessing your computer files, systems, or networks and demands you pay a ransom for their return.
- Spoofing and phishing schemes aimed at tricking you into providing sensitive information to scammers.
Cyber Crime Investigation
While Wall Street has seen increased investments to combat these cybercrimes, the FBI’s Internet Crime Complaint Center (IC3) continued to receive a record number of complaints from Americans in 2021, with 847,376 reported complaints, which was a 7% increase from 2020, with potential losses exceeding $6.9 billion. Among the complaints received, IC3 reported that ransomware, BEC schemes, and the criminal use of cryptocurrency were among the top incidents. More specifically, BEC schemes resulted in 19,954 complaints with an adjusted loss of nearly $2.4 billion.
Another report by IBM revealed that the average cost of a data breach in the U.S. has grown nearly 170% in 16 years, from $3.5 million in 2006 to $9.4 million in 2022.
With the continued rise in cyberattacks, chief information officers are saying that cybersecurity will once again be their top investment priority in 2023, indicating a strong demand for security services, which could bolster cybersecurity stocks and other cyber-related investment vehicles.
Investing in Cybersecurity ETFs and Indexes
For investors seeking to access a portfolio of cybersecurity companies, there are several indexes and ETFs that they could allocate capital toward.
For instance, the Nasdaq CTA Cybersecurity Index™ (NQCYBR™) continues to show a broadly strong trend in fundamentals, with aggregate free cash flow forecasted to grow by 8% in fiscal year 2022 vs. fiscal year 2021. Furthermore, 90% of the index weight is tied to 33 companies with positive free cash flow in 2022. From an operating margin perspective, 88% of the index is tied to companies with forecasted improvements in operating margins in 2022.
Notably, this study found that the Nasdaq CTA Cybersecurity Index outperforms the broader market when data breaches are disclosed, with stronger outperformance one and three months after data breach disclosures.
Beyond the Nasdaq CTA Cybersecurity Index™, cyber ETFs are just one of a growing group of increasingly popular “thematic ETFs,” which give investors quick access to a diversified basket of stocks with exposure to a specific investment or economic theme.
As Nasdaq Chief Economist Phil Mackintosh recently wrote, there are 30 cyber ETFs worldwide, with assets that top $12.9 billion. The largest of those ETFs, First Trust Nasdaq Cybersecurity ETF (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. Other prominent cyber ETFs listed on Nasdaq include Global X Cybersecurity ETF (BUG), Wisdom Tree Cybersecurity Fund (WCBR) and ProShares Ultra Nasdaq Cybersecurity ETF (UCYB). There is also L&G Cyber Security UCITS ETF (USPY), which tracks the ISE Cyber Security UCITS Index™ (HUR™).
Opportunities for Cybersecurity Investment Growth
While the cybersecurity investing landscape has flourished in recent years, there are three key areas for growth going forward.
- Artificial Intelligence & Machine Learning: According to Forrester's Global AI Software Forecast, cybersecurity is the fastest-growing AI software category, with significant investments being made in real-time monitoring and response in order to mitigate growing cybersecurity threats. A separate report by Pillsbury Law and the Economist Intelligence Unit found that cybersecurity-related AI spending is expected to increase at a 24% compound annual growth rate through 27, reaching a $46 billion market value.
- Zero Trust Solutions: Another recent survey conducted by Forrester Consulting on behalf of Cloudflare found that 82% of firms are “committed” to migrating to a Zero Trust security architecture. Although this interest has not led to widespread adoption yet, with only 39% of organizations surveyed reported having completed at least one Zero Trust pilot this year, indicating significant room for growth.
- Quantum Computing: Quantum resiliency will be a key focus for future cybersecurity developments, with expectations that quantum-enabled systems will be able to crack modern public-key encryption in the next decade or so.
With the continued rise in the number of cyberattacks, these areas will be critical in advancing security, and investors have a variety of options to tap into this space.
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