It’s been a tough year for technology-focused equity strategies as investors turn away from the potentially faster-growing sector in a rising rate environment. Indeed, popular sector ETFs like the Vanguard Information Technology ETF (VGT) and the SPDR Technology Sector Fund (XLK) were down more than 20%. Still, investors haven’t necessarily bailed on technology-focused thematic ETFs more closely tied to long-term trends.
Cybersecurity ETFs first rose to prominence nearly a decade ago when a group of hackers leaked confidential information from Sony Pictures. However, fund performance accelerated in 2020 as millions of Americans and even more around the world began an unplanned experiment of more than two years working from anywhere. Almost immediately, companies turned to the cloud to operate and redoubled their efforts to keep proprietary hardware secure. Despite continued technology spending and the growing cybersecurity threat once Russia invaded Ukraine, the four largest cybersecurity ETFs are down 17% to 23% year-to-date through May 6. July.
However, these four ETFs have attracted around $900 million in new money this year, with three of the four seeing inflows. Advisors and end clients are looking longer term with these ETFs.
According to Global X, cybersecurity technologies work to proactively protect against possible attacks while mitigating and repairing damage from incidents that have already occurred. The increase in the frequency and severity of cyberattacks demonstrates the ongoing need for cybersecurity spending. For cybersecurity companies, this increasingly critical need creates a business model that generates robust, recurring revenue.
According to the March 2022 forecast, global cybersecurity revenue is expected to reach $212 billion by 2026, compared to $133 billion in 2021 according to Statista, and this data does not reflect the impacts of the Russian invasion on the market. .
The First Trust NASDAQ Cybersecurity ETF (CIBR) is the largest of the quartet, with $5.2 billion in assets after enjoying $721 million in net inflows in 2022. CIBR was down 20% for the year.
The ETFMG Prime Cyber Security ETF (HACK) is the first cybersecurity ETF, launched in 2014. However, HACK’s $1.6 billion asset base was hit this year by $104 million in net outflows and a 22% loss worse than its peers in 2022.
The ETF Global X Cybersecurity (BUG) fell in value the least of the four, with a loss of only 17%. The $1.1 billion ETF generated $224 million in new money in 2022.
The iShares Cybersecurity & Tech ETF (IHAK) raised $50 million and recently managed $535 million in assets. IHAK has fallen 18% since the start of the year.
IHAK has the lowest expense ratio of the four, with fees of 0.47%, three basis points lower than BUG and 13 basis points lower than CIBR and HACK. Yet recent performance differences among cybersecurity ETF peers underscore the importance of digging deeper.
For example, CIBR and HACK recently held the top 10 stakes in Cisco Systems (CSCO) and Cloudflare (NET), which were not positions in BUG or IHAK. Even when all four ETFs agreed to hold a technology stock, they did not have a similar position size. For example, Palo Alto Networks (PANW) had a recent position of 8.4% in BUG, more than 200 basis points higher than its peers.
With cybersecurity remaining an ongoing global threat, we believe these thematic ETFs will remain relevant to many long-term advisors.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.