Cybersecurity ETFs to Stay Ahead of the Threat

Cybersecurity is a top investment theme and mega-trend for 2023 and it's not hard to see why. The threat of cyberattacks is rapidly growing, and it's not just corporations that are at risk. From individual consumers to small businesses, everyone is becoming vulnerable to the dangers of cybercrime. 

With the rise of remote work and the increased reliance on digital technologies, the attack surface for hackers has expanded, creating even more opportunities for cybercrime to take place. In this rapidly evolving landscape, the need for cybersecurity solutions has never been greater. 

Companies specializing in cybersecurity products and services are poised for significant growth in the coming years thanks to a high-demand market. By investing in cybersecurity ETFs, investors can potentially benefit from increased diversification compared to single cybersecurity stocks.

The case for cybersecurity

Investors searching for the thematic tailwinds behind growth in the cybersecurity industry should give Verizon's 2022 Data Breach Investigations Report (DBIR) a thorough read. This annual report provides insights and analysis into over 23,000 incidents and 5,200 breaches around the world. Here are some of the most eye-opening insights from the report:

• Human error is still the biggest threat to data security, with 82% of breaches involving some human element, and employees inadvertently causing a quarter of all data breaches.
• Ransomware attacks are becoming an increasingly common and costly problem with a 13% year-over-year increase, with one in four organizations falling victim to these types of attacks.
• Time is of the essence when it comes to responding to a data breach. Companies that respond within 30 days can save up to $1 million compared to those that take longer to react.
• Investing in security measures like encryption and multi-factor authentication can go a long way in reducing the risk of a data breach and mitigating its impact.

The DBIR is a wake-up call for businesses to take cyber security seriously, and to implement measures to protect themselves against the increasing threat of cybercrime. These measures often involve procuring the services and products of dedicated cybersecurity vendors, who may experience a boost to their revenues, earnings, and share prices. 

Cybersecurity ETF spotlight

LGIM's flagship cybersecurity offering is the L&G Cyber Security UCITS ETF (ISPY), which currently sports $2.4 million in assets under management (AUM). This ETF tracks the performance of the ISE Cyber Security UCITS Index, which holds global stocks that are deemed to generate a material percentage of their revenues from cybersecurity products and services. ISPY splits its holdings into two subsectors: 

1. Cybersecurity infrastructure providers, which develop hardware and software.
2. Cybersecurity service provides, which provide consulting and other assistance. 

The ETF also imposes screens on sufficient market cap size and liquidity, and weights its holdings based on sector market caps, with companies equally weighted within subsectors. 

Looking at the holdings, we see that the majority of the ETF is concentrated in U.S. cybersecurity companies at 70%, with Israel coming in second at 11% and Canada third at 6.5%. ISPY has a total of 43 constituents and is somewhat top-heavy, with the top 10 holdings accounting for roughly 43% of the ETF's weight. The ETF's expense ratio stands at 0.69%. 

For environmental, social, & governance (ESG) conscious investors, LGIM offers a companion ETF in the form of the L&G Emerging Cyber Security ESG Exclusions UCITS ETF (ESPY). This ETF tracks a different benchmark, the Solactive Emerging Cyber Security Index.

In terms of holdings, ESPY is still dominated by U.S. (71%) and Israeli (11%) companies, but has Netherlands (8%) and Japan (7%) replacing Canada. The ETF is more concentrated with 32 holdings, with the top 10 constituents accounting for 39% of the ETF's weight. 

ESPY's ESG screener can be found here. The ETF follows the Solactive ESG Enhanced Exclusions criteria, which screens for compliance with the UN Global Compact and avoidance of tobacco, weapons, coal, oil & gas, nuclear power, alcohol, gambling, and adult entertainment to name a few. 

For more options, Trackinsight has identified 8 UCITS funds that currently provide exposure to the Cybersecurity theme within the Digital Infrastructure and Connectivity trend.   

*IMPORTANT: The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Trackinsight. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A FINANCIAL PROFESSIONAL IS STRONGLY ADVISED.