Broadly speaking, technology is viewed as a growth sector and within that space, some industries are really propelling growth. Cybersecurity is one of the fastest-growing sub-groups in the broader technology universe. Data confirms as much.
The market size estimate for cybersecurity in 2017 was around $120 billion, up from just $3.5 billion in 2004. How’s that for compound annual growth rates (CAGR)?
“Cybersecurity Ventures predicts global spending on cybersecurity products and services will exceed $1 trillion cumulatively over the next five years, from 2017 to 2021,” said the research firm. “We anticipate 12-15 percent year-over-year cybersecurity market growth through 2021, compared to the 8-10 percent projected over the next five years by several industry analysts.”
Even more conservative estimates are still impressive. One estimate says the cybersecurity market will notch a CAGR of 11% through 2022. Fortunately, there are several exchange-traded funds (ETFs) we can use to gain exposure to cybersecurity stocks. Consider some of the following cybersecurity ETFs.
Cybersecurity ETFs to Buy: ETFMG Prime Cyber Security ETF (HACK)
Expense Ratio: 0.60%
The ETFMG Prime Cyber Security ETF (NYSEARCA:HACK) debuted in November in 2014 and it is the first cybersecurity ETF to come to market in the U.S. HACK follows the Prime Cyber Defense Index and holds companies that “offer hardware, software, consulting and services to defend against cybercrime,” according to the issuer.
The $1.30 billion HACK holds 47 stocks and its top 10 holdings combine for about 45% of its weight. HACK is a global ETF with exposure to seven countries, but U.S. stocks account for more than 76% of the fund’s weight. This cybersecurity ETF features exposure to six sectors and industry groups, but software makers represent more than half of HACK’s weight.
While the case for cybersecurity investing is compelling, the rub is that related funds have, at various points in their still young lives, been laggards. Over the past three years, HACK has trailed the tech-heavy Nasdaq 100 Index and the Technology Select Sector Index by wide margins.
Cybersecurity ETFs to Buy: First Trust Nasdaq Cybersecurity ETF (CIBR)
Expense Ratio: 0.60%
The First Trust Nasdaq Cybersecurity ETF (NASDAQ:CIBR) is the primary rival to the aforementioned HACK and the only other dedicated cybersecurity ETF in the U.S. CIBR turns three in July and with over $490 million in assets under management, proves there is room for more than cybersecurity ETF on the block.
CIBR tracks the Nasdaq CTA Cybersecurity Index and has a smaller roster than HACK with a roster of just 33 stocks. Palo Alto Networks Inc. (NASDAQ:PANW), Akamai Technologies, Inc. (NASDAQ:AKAM) and Symantec Corp. (NASDAQ:SYMC) combine for 18.42% of CIBR’s weight. HACK’s holdings have a median market value of $3.72 billion, putting this cybersecurity fund in mid-cap territory.
While CIBR has lagged the Nasdaq 100 Index and the Technology Select Sector Index since inception, it has also outperformed the rival HACK while being less volatile.
Cybersecurity ETFs to Buy: ALPS Disruptive Technologies ETF (DTEC)
Expense Ratio: 0.50%
As was noted earlier, HACK and CIBR are the only dedicated cybersecurity ETFs in the U.S. For investors looking for exposure to the cybersecurity theme without making an “all-in” bet, the ALPS Disruptive Technologies ETF (NYSEARCA:DTEC) is a fund to consider.
DTEC applies a unique methodology that sees it equally weight 10 disruptive technology themes, including cybersecurity. DTEC, which debuted in December, then equally weights its individual holdings, a strategy that can reduce single stock risk. Other disruptive technology themes represented in DTEC include 3D printing, fintech, healthcare innovation, internet of things and robotics, among others.
One of the cornerstones with the DTEC methodology is that, from month-to-month, various disruptive themes will perform better than others, but the themes represented in the fund are interconnected, which can drive long-term returns. Cybersecurity was DTEC’s leading theme in February.
Cybersecurity ETFs to Buy: BlueStar Israel Technology ETF (ITEQ)
Expense Ratio: 0.75%
After the U.S. and some Asian economies, such as China, Japan and South Korea, few countries have a vibrant technology on par with Israel. Israel has been dubbed “startup nation” and is a cybersecurity juggernaut in its own right.
“Israel’s cybersecurity industry is second only to the United States in terms of investment dollars: Last year alone, Israeli cybersecurity companies big and small raised a combined $847 million, according to YL Ventures, an investment firm with offices in Tel Aviv and Silicon Valley,” reports CNBC.
While the BlueStar Israel Technology ETF (NYSEARCA:ITEQ) is not a dedicated cybersecurity ETF, its exposure to that theme is ample. Additionally, investors considering Israel cannot overlook the advantages of ITEQ’s tech focus. This Israel ETF is up 17.70% over the past year, while the MSCI Israel Capped Investable Market Index, with a 28.14% weight to tech stocks, is barely higher. ITEQ is home to 76 stocks.
Cybersecurity ETFs to Buy: iShares North American Tech-Multimedia Networking ETF (IGN)
Expense Ratio: 0.48%
Oft-overlooked in the technology ETF conversation, the iShares North American Tech-Multimedia Networking ETF (NYSEARCA:IGN) turns 17 years old in July. This season fund tracks the S&P North American Technology-Multimedia Networking Index and has the smallest roster of the ETF’s highlighted year with just 25 holdings.
IGN’s relatively small roster does include robust cybersecurity exposure by way of Palo Alto Networks and Cisco Systems Inc. (NASDAQ:CSCO), among others. Those two stocks, IGN’s second- and fourth-largest holdings, respectively, combine for over 17% of the fund’s weight. In fact, IGN has the largest weight to Palo Alto of any ETF on the market.
IGN is up 38.5% over the past 36 months with annualized volatility of 17.7% over that period.
Todd Shriber does not own any of the aforementioned securities.