CIBR - CIBR: Volatile Alpha That's Hard To Hack
2023-10-09 09:14:04 ET
Summary
- First Trust NASDAQ Cybersecurity ETF provides exposure to companies in the cybersecurity sector.
- CIBR has not outperformed the S&P 500 on a sustained basis.
- CIBR has outperformed its peers in terms of returns and assets under management.
If you spend more on coffee than on IT security, you will be hacked. - Richard Clarke
There are certain market themes that are undeniable in terms of longer-term growth and need. One of those is cybersecurity. The world is becoming increasingly digitalized, leading to an escalating need for advanced cybersecurity solutions. One investment vehicle that has capitalized on this trend is the First Trust NASDAQ Cybersecurity ETF (CIBR). This ETF provides investors with exposure to a diversified portfolio of companies pioneering in the cybersecurity sector. CIBR aims to replicate the performance of the Nasdaq CTA Cybersecurity Index (NQCYBR). This index tracks the performance of companies involved in the cybersecurity sector, including those that offer services and products related to the building, implementation, and management of security protocols applied to private and public networks, computers, and mobile devices.
On the surface, one would think this is a no-brainer investment, and to many degrees I think that's true. The problem is that when you look at the ratio of CIBR to the S&P 500 ETF (SPY), it really hasn't outperformed on a sustained basis. The performance of the fund since inception roughly matches that of the S&P.
Why hasn't the fund beat the S&P 500 as a thematic play on cybersecurity, despite the obvious future prospects of the space? The simplest answer is probably the right one - because it's not a large-cap fund.
The median market cap is $9.5 billion, making this more of mid-cap strategy. When we look at the S&P MIDCAP 400 ETF (MDY) relative to the S&P 500 ETF (SPY), it's clear that mid-caps have struggled against large-cap concentrated headline averages. CIBR among mid-cap averages has overall done better than against large-cap ones.
Holdings of CIBR
CIBR had a total of 33 holdings, with a maximum market cap of $342 billion and a median market cap of $9 billion. The minimum market cap currently is $430 million. The ETF has a strong focus on the software industry, which makes up 53% of its portfolio. IT Services and Communications Equipment are the other two prominent sectors in the portfolio.
The top five holdings of CIBR, which make up approximately 30% of the ETF's portfolio, include:
- Infosys, Ltd.
- Palo Alto Networks, Inc.
- Fortinet, Inc.
- Cisco Systems, Inc.
- Broadcom
The valuations on the holdings have a wide range. Infosys looks reasonable at 25 while Palo Alto's is at 195 (expensive for sure, but the stock has had a major run). Fortinet is at 45, and stalwart Cisco is the most reasonably attractive at 17.41 with Broadcom at 26. Some will argue that price-to-earnings ratios are irrelevant, but the metric still provides a sense of potential overvaluation by the stocks that drive a significant percentage of forward returns.
Peer Comparison
Comparing CIBR to its peers reveals its competitive edge. The WisdomTree Cybersecurity Fund ETF (WCBR), Global X Cybersecurity ETF (BUG), ETFMG Prime Cyber Security ETF (HACK), and iShares Cybersecurity and Tech ETF (IHAK) are among the similar ETFs in the market. However, CIBR has outperformed most of these ETFs in terms of returns and assets under management.
The Case for CIBR
Cybersecurity is a rapidly growing industry, with the global costs of cybercrime predicted to hit $10.5 trillion by 2025. As such, there is a significant demand for effective cybersecurity solutions, and companies operating in this space are well-positioned to benefit. From that perspective, one can argue this is a fund that should be in most portfolios, just keep in mind that most market averages will have exposure to these companies anyway. This is more a question of how much you want to overweight the theme relative to a core allocation.
With its diverse portfolio of cybersecurity companies, CIBR offers investors a unique opportunity to gain exposure to this flourishing industry. CIBR has demonstrated strong performance and growth potential adjusted for its average market cap in a cycle that has largely favored large-caps. This suggests that it could be a valuable addition to an investment portfolio, provided it is sized appropriately relative to a core equity fund.
I think this is a good fund and a great long-term theme. The First Trust NASDAQ Cybersecurity ETF presents an attractive investment opportunity for those looking to capitalize on the growing demand for cybersecurity solutions.
For further details see:
CIBR: Volatile Alpha That's Hard To Hack