Cybersecurity Investing 101

Here’s How to Navigate This Quickly Evolving Industry

One of the biggest threats to corporate America is ransomware.  The growing possibility of losing access to important or confidential digital property is a nightmarish scenario for executives as the financial consequences can be enormous.  

But it’s not just major companies that are at risk.  We are all threatened with the loss of personal data security as hackers continue to come up with new ways to exploit networks, software and the array of evolving technology services.  As the world advances to become more digitized, so too do its threats.

For investors in cybersecurity stocks, these attacks are one of several tailwinds, says Morningstar senior equity analyst Mark Cash.

The “heightened threat environment, networking changes due to the pandemic changing how security works, legislation ramping up fines for miscues, spending becoming proactive and commanding a larger portion of IT budget, and these headline grabbing breaches all help the demand,” he says.

Cybersecurity is a young, quickly evolving industry, which means that betting on individual stocks can be especially risky.  If you’re looking to benefit from this trend, why not consider owning a wide spectrum of cybersecurity stocks through an exchange traded fund (ETF)?  In this article we’ll highlight two ETFs focused on companies that provide protection against cyberattacks.  

First Trust NASDAQ CEA Cybersecurity ETF (CIBR)

CIBR tracks an index of companies engaged in the cybersecurity segment of the tech and industrial sectors.  To make the cut, a company must be classified as a cybersecurity company by the Consumer Technology Association (CTA) and have a minimum market cap of $250 million.  This means it holds primarily software and networking companies, but also branches out from the tech sector into more diversified industries like aerospace & defense.  This slightly expanded focus is the major distinction between CIBR and other similar funds, most of which have small, tech-dominated portfolios.  

To ensure liquidity in the underlying stocks, which is a concern for ETFs that invest in small-cap names, companies must have a minimum free-float of 20%.  The index then weights stocks based on their underlying liquidity, and imposes caps on how large any one security can become . The portfolio includes familiar names like Cisco Systems, Akamai and NortonLifeLock.

  • Weighted Average Market Cap  $42.02B
  • Price / Earnings Ratio   81.51
  • Price / Book Ratio  7.94
  • YTD Total Return  10.26%
  • Yield  0.2%
  • Expense Ratio  0.6%
  • Net Assets   4.06B
  • Number of Holdings  40
  • Top Holdings      Cisco (CSCO), Accenture (ACN), CrowdStrike (CRWD)

Global X Cybersecurity ETF (BUG)

BUG provides exposure to companies involved in the development and management of security protocols preventing intrusion and attacks to systems, networks, applications, computers, and mobile devices.  Eligible securities are those in emerging and developed countries and are selected based on revenue which must be at least 50% generated from cybersecurity activities.  The fund also invests in ADRs and GDRs based on such securities.  

BUG tracks the Indxx Cybersecurity Index, which gauges the performance of companies that operate within the cybersecurity industry.  The index weights its constituents by market-cap but each are subject to caps, thereby limiting concentration on large-cap companies and increasing exposure to other companies.  The top 40 cybersecurity companies will form the final index.  The index is reconstituted and re-weighted semi-annually.

  • Weighted Average Market Cap  $14.70B
  • Price / Earnings Ratio   621.95
  • Price / Book Ratio  70.43
  • YTD Total Return  6.48%
  • Yield  0.47%
  • Expense Ratio  0.5%
  • Net Assets   635.77M
  • Number of Holdings  33
  • Top Holdings      Fortinet (FTNT), Palo Alto Networks (PANW), CrowdStrike (CRWD)

Should you invest in Global X Cybersecurity ETF right now?

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