It's an idea that isn't always given much thought, but not every type of investment is well suited for every type of investment account.
Higher-risk trades that might result in a loss often make the most sense when placed using a taxable brokerage account since that loss can be used to lower taxable income. Similarly, investors in need of current dividend income may be best served by owning their dividend-paying names in a brokerage account rather than a tax-deferred retirement account. They can make the most of an IRA by using them as vehicles to hold long-term growth prospects.
It's for reasons like these that retirement-minded investors currently managing a retirement account may want to consider stepping into the First Trust Nasdaq Cybersecurity ETF (NASDAQ: CIBR) and leaving it alone for a few -- or maybe many -- years.
Image source: Getty Images.
The need is real and here to stay
The world now operates under the unfortunate reality that hackers are always trying to break in. Target's 2013 cybersecurity breach exposed credit card data for 41 million of its customers; in 2017 credit bureau Equifax was hacked; and earlier this year, cybercriminals were able to shut down Colonial Pipelines' gas distribution system. Clearly, cybercrime is a problem that isn't going away anytime soon ... if ever.
What most people may not know is the sheer financial cost of inadequate cybersecurity. McAfee and the Center for Strategic and International Studies jointly reckon that cybercrime ultimately costs the world more than $1 trillion per year when factoring in the ancillary, indirect damage done by a successful hack.
Nearly all entities that use even the most meager of computer networks are responding because it's still cheaper to prevent a breach than it is to clean one up. Cybersecurity Ventures, a leading researcher, forecasts that $262 billion worth of spending on digital defense this year will swell to nearly $460 billion in 2025. That's a ton of money and a lot of growth potential to boot for the hackers and for the companies working to stop them.
The First Trust Nasdaq Cybersecurity ETF in focus
Enter the First Trust Nasdaq Cybersecurity ETF.
This exchange-traded fund (ETF) holds stakes in cybersecurity-related companies ranging from CrowdStrike (NASDAQ: CRWD) to Splunk (NASDAQ: SPLK) to Cisco Systems (NASDAQ: CSCO) to its biggest position, Palo Alto Networks (NYSE: PANW). Indeed, most of its holdings are predictable names even if they're not solely focused on cybersecurity. Enterprise networking also makes up a big part of the fund's holdings.
Like most ETFs, this one solves a key problem plaguing investors. Namely, it offers investors exposure to an obvious but complicated opportunity. That is to say, most people know cybercrime is a growing problem. They may not fully understand, however, why Palo Alto's cloud-security platform Prisma is increasingly a must-have sort of service, or that Splunk's Observability allows app developers to write their coding better and faster. And with this ETF, you don't have to know. With the First Trust Nasdaq Cybersecurity ETF, you're simply well plugged into a major theme.
There's another nuance here that makes this ETF a better pick than other cybersecurity exchange-traded funds: This fund is neither cap-weighted nor equal-weighted. Rather, it's a hybrid of both.
How does that work? It's actually not as complicated as it might sound.
The Nasdaq CTA Cybersecurity Index that this fund is intended to mirror isn't market cap-weighted. Cap-weighted means the bigger the company, the more that stock that's held in the portfolio. Instead, the Nasdaq bases the index's individual company weighting on the average dollar amount of each company's trading volume. Then -- and here's what makes it a hybrid -- none of the index's current 36 holdings may account for more than 6% of the index's value. The end result is a better-balanced ETF that isn't dangerously top-heavy due to a handful of huge companies.
It's a fairly unusual approach to creating and managing an index, and subsequently, an ETF. It may also seem unnecessary and even a bit limiting; sometimes the best thing to do is let winners run. After all, if an index constituent is getting "too big" relative to other names that make up the index, it's doing so because it's performing well.
This particular index methodology, however, appears to work to investors' advantage. The First Trust Nasdaq Cybersecurity ETF has managed to outperform comparable ETFs, including the iShares Cybersecurity and Tech ETF (NYSEMKT: IHAK) and the ETFMG Prime Cyber Security ETF (NYSEMKT: HACK) over the past few years.
HACK data by YCharts
The performance disparity is arguably due to this unique allocation and rebalancing effort as it effectively locks in profits on big winners. At the same time, it adds more exposure to names that haven't been of interest to investors lately but may be due for a game-changing headline.
Accentuating all the positives
A perfect pick? No, there's no such thing as "perfect." The First Trust Nasdaq Cybersecurity ETF is not the only stock or ETF you'd want to sit on for the next 20 or 30 years.
This fund is certainly one of a small handful of great ETF picks for retirement portfolios due to its clear, above-average growth potential, below-average risk, and an indexing methodology that doesn't force an investor to become an expert in one particular facet of cybersecurity.
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James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends CrowdStrike Holdings, Inc., Palo Alto Networks, and Splunk. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.