Technology stocks and the corresponding exchange-traded funds (ETFs) were pummeled in October, but those declines could represent buying opportunities, particularly in more focused, nuanced industry ETFs. That includes cybersecurity funds.
Recent price action suggest cybersecurity funds could be leaders as tech rebounds. More importantly, scores of data points confirm the potential of cybersecurity funds over the long haul.
“Growth in the sector has been staggering,” reports Forbes. “According to the research and publishing company Cybersecurity Ventures, worldwide spending on products and services in cyber security was $120 billion in 2017, up from $3.5 billion in 2004. By 2021, it will exceed $1 trillion.”
A recent report by BDO Global Advisory highlights the long-term, positive growth in cybersecurity spending trends, a theme that bodes well for cybersecurity funds.
“While nearly eight-in-ten (79 percent) directors surveyed claim they have avoided a data breach or incident in the past two years, public company boards are becoming more involved in cyber oversight, with 72 percent of board members saying the board is more involved with cybersecurity now than they were 12 months ago,” according to the BDO report.
With that in mind, here are some of the best ETFs that will benefit from trends in the cybersecurity space.
ETFMG Prime Cyber Security ETF (HACK)
Expense Ratio: 0.60%, or $60 annually per $10,000 invested.
Among dedicated cybersecurity funds, the ETFMG Prime Cyber Security ETF (NYSEARCA:HACK) is the oldest, having debuted four years ago. But it’s still one of the best ETFs in the space. Some highly nuanced industry ETFs struggle to attract investors’ assets, but HACK highlights the potential potency of cybersecurity funds with $1.58 billion in assets under management.
Home to 52 stocks, this cybersecurity fund tracks the Prime Cyber Defense Index. None of HACK’s holdings exceed weights of 4.62% and the top four holdings combine for about 18% of the cybersecurity fund’s roster. HACK’s roster includes familiar names, such as Cisco Systems (NASDAQ:CSCO) and FireEye (NASDAQ:FEYE). This cybersecurity fund is up more than 4% over the past week and more than 14% year-to-date.
“A relatively young industry, spending has grown 35x from 2003 to 2016 with 2017-2021 spending expected to combine for $1 Trillion,” according to HACK’s issuer.
First Trust NASDAQ CEA Cybersecurity ETF (CIBR)
Expense Ratio: 0.60%
Among cybersecurity funds, the First Trust NASDAQ CEA Cybersecurity ETF (NASDAQ:CIBR) is the most direct competitor to HACK, though the First Trust offering is several months younger. The $742.55 million CIBR follows the Nasdaq CTA Cybersecurity Index.
That benchmark “includes companies primarily involved in the building, implementation, and management of security protocols applied to private and public networks, computers, and mobile devices in order to provide protection of the integrity of data and network operations,” according to Illinois-based First Trust.
There are important differences between CIBR and HACK. For example, the former holds 38 stocks, well below the size of HACK’s roster. Over the past three years, the better performer among the cybersecurity funds has been CIBR … to the tune of 760 basis points.
BlueStar Israel Technology ETF (ITEQ)
Expense Ratio: 0.75%
The BlueStar Israel Technology ETF (NYSEARCA:ITEQ) is not a dedicated cybersecurity fund, but it is one of the most viable options for investors looking to play this industry. Undoubtedly, Israel is one of the leading countries when it comes to established cybersecurity companies as well as relevant industry startups.
As of mid-2018, Israel was home to nearly 170 cybersecurity startups. Some of those companies make for ideal acquisition targets for larger tech companies looking to bolster their cybersecurity footprints, while others are landing contracts with U.S. Firms.
ITEQ, which recently turned three years old, provides exposure to companies involved in artificial intelligence, autonomous driving, CleanTech, CefenseTech and agritech as well as cybersecurity. This cybersecurity fund is up more than 6% year-to-date.
iShares North American Tech-Multimedia Networking ETF (IGN)
Expense Ratio: 0.47%
The iShares North American Tech-Multimedia Networking ETF (NYSEARCA:IGN) is not a dedicated cybersecurity fund, either, but its 23 holdings feature more than adequate exposure to the cybersecurity theme.
IGN’s top 10 holdings include Cisco, Palo Alto Networks (NASDAQ:PANW) and several other cybersecurity players. One advantage of IGN is that it is less volatile than the dedicated cybersecurity funds as highlighted by a three-year standard deviation of just over 13%.
ALPS Disruptive Technologies ETF (DTEC)
Expense Ratio: 0.50%
With the universe of dedicated cybersecurity funds still sparsely populated, the ALPS Disruptive Technologies ETF (NYSEARCA:DTEC) is one of the better ideas to consider among tech funds. Many traditional tech ETFs lack adequate cybersecurity exposure, but that is not the case with DTEC.
Compared to traditional, diversified tech ETFs, DTEC’s 10% weight to cybersecurity stocks is large. DTEC’s holdings are equally weighted, which can help minimize some of the risks associated with large concentrations in just one or two stocks. DTEC could also be an interesting way for investors to buy the tech dip. After slumping in October, DTEC is up almost 5.7% over the past week.
Invesco Dynamic Networking ETF (PXQ)
Expense Ratio: 0.63%
Although it’s another technology ETF that is not explicitly devoted to cybersecurity stocks, the Invesco Dynamic Networking ETF (NYSEARCA:PXQ) does make for a solid alternative to dedicated cybersecurity products. In fact, a solid amount of PXQ’s 30 holdings are also found in cybersecurity funds like CIBR and HACK.
Stocks residing in CIBR and PXQ include Cisco, Palo Alto Networks, F5 Networks (NASDAQ:FFIV) and Imperva (NASDAQ:IMPV). PXQ uses a fundamentally weighted strategy that tilts toward growth stocks.
PXQ’s underlying index “evaluates companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to Invesco.
SPDR Kensho Future Security ETF (XKFS)
Expense Ratio: 0.46%
The SPDR Kensho Future Security ETF (NYSEARCA:XKFS), which is just a few weeks shy of its first anniversary, is one of the more credible competitors in the cybersecurity fund universe.
XKFS holdings include companies engaged in “cyber security, advanced border security, and the following areas for military application: robotics, drones and drone technologies, space technology, wearable technologies and virtual or augmented reality activities,” according to the issuer.
Up an admirable 9% year-to-date, this cybersecurity fund holds 67 stocks, none of which exceed weights of 2.79%. Several cybersecurity stocks are found among XKFS’s top 10 holdings.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
