In an era when even the most tech-savvy companies are not immune to cybersecurity threats, investing in cybersecurity companies might create a diversified hedge against what the growing threats could mean to some of your holdings. This is because the sector is in a strong growth trend and tends to rally when a report of an attack occurs. The recent alleged payment of a $400,000 ransom in Bitcoin (BTC-USD) by communications giant AT&T (T) to hackers for data deletion is the most recent wake-up call for the digital world.
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There are growing risks to corporations and households that place a growing reliance on digitized records and information. Unfortunate and even frightening events remind us of the potential for investment opportunities in the growing niche related to cybersecurity.
The Rising Tide of Cyber Threats
Cybersecurity threats are on the rise. In fact, ransomware attacks affected 66% of organizations in 2023, according to the Deloitte Cybersecurity Threat Trends Report 2024. The abuse of valid credentials accounted for 44.7% of data breaches, and there was a 400% increase in IoT (Internet of Things) malware attacks across various industries. The manufacturing industry was the most targeted sector globally.
The Cost of Cyber Insecurity
The financial impact of cyber threats is staggering. The healthcare industry is expected to spend $125 billion on cybersecurity from 2020 to 2025. As for other industries, the first half of 2021 saw a 102% increase in cybercrime involving ransomware compared to the beginning of 2020. The FBI received 19,369 business email compromise complaints.
The Unpreparedness of Businesses
Businesses seem caught off guard. Despite the growing threats, many companies are underprepared. The lack of implementation of cybersecurity products and services suggests that the budgets of many chief information security officers (CISOs) are underfunded. But this is changing. Small and mid-sized businesses expect to widen their deployment of end-point detection and response (EDR) tooling.
The Huge Cybersecurity Market Opportunity
The cybersecurity market presents a $2 trillion opportunity for technology and service providers. Generative AI (GenAI), unsecured employee behavior, third-party risks, continuous threat exposure, boardroom communication gaps, and identity-first approaches to security are the driving forces behind the top cybersecurity trends for 2024.
Investing in Cybersecurity Companies
Given the growing cybersecurity threats and the under-preparedness of businesses, investing in cybersecurity companies could be a wise move. These companies are constantly developing innovative solutions to combat these threats. Their expertise and technology are the only shields that businesses have to protect themselves in this increasingly digital world.
Using the TipRanks ETF Comparison Tool and including the S&P 500 (SPY) ETF as a comparison benchmark to compare five Cybersecurity ETFs, we first notice that there is a wide difference in expense ratios, assets under management, and performance between them all.
- The Global X Cybersecurity ETF (BUG) has an expense ratio in line with the average. Its one-year performance is ranked fourth among the five and well short of the SPY benchmark. The average analyst’s one-year upside is 12.07%.
- The First Trust NASDAQ Cyber Security ETF (CIBR) has one of the highest expense ratios. It has by far the highest assets under management (AUM), which provides substantial liquidity. The higher expense ratio and large size of the fund have not hurt performance, as it is one of the better performers in the YTD and 1-year categories. The average analyst’s one-year upside is 9.73%.
- The Etfmg Prime Cyber Security ETF (HACK) has the highest expense ratio of the group. The fund has over $1b in AUM and is the top performer on both a YTD and 1-year basis. The average analyst’s one-year upside is 12.34%.
- The iShares Cybersecurity and Tech ETF (IHAK) is in the middle of this pack in terms of AUM and expense ratio. It has underperformed the SPY benchmark both in the YTD and 1-year categories. The average analyst’s one-year upside is higher than all but one at 12.52%.
- The Xtrackers Cybersecurity Select Equity ETF (PSWD) has the lowest expense ratio and a very nimble $6 million AUM. While the performance in booth periods measured is at the bottom of the pack, the average analyst’s one-year upside is at the top of the group at 14.22%.
Key Takeaway – Cybersecurity Companies Likely to Continue Growing
Growing cybersecurity risks can impact large companies, which brings to light the massive need for robust cybersecurity measures. Investing in cybersecurity companies via diversified ETFs could be a prudent move to diversify a portfolio that undoubtedly has exposure to possible cyberattack targets. These companies are likely to find increasing business growth as the tech world becomes more sophisticated and needs more protection.
