IHAK - IHAK: Growth Forecasts And Ongoing Societal Digitalization Make This ETF Notable

2023-03-07 10:46:06 ET

Summary

• IHAK invests in stocks associated with cybersecurity as well as hardware, software, and information technology.
• The cybersecurity industry has strong growth forecasts and could see demand increase as the world digitalizes.
• IHAK’s growth potential is somewhat concealed behind its overvaluation and volatility.

I rate iShares Cybersecurity and Tech ETF (IHAK) a Hold. This ETF is currently overpriced, trading at 41% premium to the SPDR S&P 500 Trust ETF (SPY). However, this ETF may also be well-geared for the emergence of cybersecurity as society and the workforce integrate certain technologies into their routines.

I believe the cybersecurity industry has significant potential for long term growth, and its demand could increase with the rise of systems like fintech and robotics. The progressive implications of software and ((AI)) into industrial robotics may also increase the importance of cybersecurity in the workforce.

Fintech is the first growing industry that could catalyze the growth of cybersecurity. Fintech companies, primarily those that provide digital banking services, may want to enhance their cybersecurity as the consequences of clients losing money could be quite detrimental.

Growth in the robotics industry could also facilitate growth of cybersecurity stocks, as many robots are now operated via software or artificial intelligence rather than manual control. Software was quite a popular target for hackers during 2022 and artificial intelligence may become a similar victim as it expands. Therefore, the robotics industry's assimilation into the workforce could increase the demand for cybersecurity and benefit many of the stocks held in IHAK.

Strategy

IHAK tracks the NYSE FactSet Glb Cyber Security NR USD Index and uses a representative sampling technique. This ETF invests in both growth and value stocks of diversified market capitalizations. IHAK was launched by BlackRock Inc., and is currently managed by BlackRock Fund Advisors.

Holdings Analysis

IHAK invests mainly in the technology sector, sparing only 4% to industrials. Within technology, this ETF's holdings are mainly centered on cybersecurity hardware, software, and information technology. IHAK allocates 43% to the top 10 holdings and 90% to the top 25 in an ETF of 63 holdings, making this ETF rather top heavy. Investors may want to consider both sector risk and concentration risk in this ETF as both factors contribute to IHAK's elevated volatility.

IHAK is mainly focused on companies in the United States, with only 19% of holdings residing outside of the country. Non-United States holdings are located primarily in East Asia and Europe. Investors could therefore deem these nations to be mostly unimpactful in this ETF's ultimate performance.

Strengths

The cybersecurity sector has decently strong growth forecasts , as seen in the chart below. The cybersecurity industry is expected to grow to $376B by 2029, at a CAGR of 13%.

Though it is not the main focus of this ETF, the information technology sector also has attractive growth prospects , as seen in the chart below. The information technology industry is expected to grow to over $1T by 2030 at a CAGR of 8%.

As I investigated in my previous piece on First Trust Nasdaq CEA Cybersecurity ETF ( CIBR ), the " cloud migration " occurring in the workforce could make IHAK quite strong. As storing and exchanging information on The Cloud makes it accessible to hackers, the Cloud's augmentation could also demand enhanced cybersecurity.

Weaknesses

Though cybersecurity could see momentous growth in the long term, IHAK still has somewhat high expenses and volatility. Therefore, investing in IHAK could be a potentially risky approach to profiting from cybersecurity expansion. This ETF has an expense ratio of 0.47% and an annualized volatility of 29% compared to 23% in the broader market.

IHAK has a very low dividend yield of 0.24%, which could deter many value investors. As growth stocks saw significant losses in 2022, many shifted their focus toward dividends. If the economy doesn't recover quickly enough, this could mean short- to-medium term losses for IHAK. I briefly discussed this in my article on iShares U.S. Real Estate ETF ( IYR ).

Opportunities

I believe that industrial robots could become a prominent asset in sectors like healthcare and logistics, especially as they become smarter and more affordable . I investigate this further in my article on the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ).

Healthcare is already a common target for hackers. In this regard, such as robots' operational systems getting hacked to where their utility was compromised could hurt the profits of both the robotics manufacturing companies and the companies where the robots operate.

I covered the potentially profitable future of fintech in my previous piece on Global X FinTech Thematic ETF ( FINX ). Although older generations are familiarizing themselves with fintech , users are still primarily younger individuals, many of whom might not be financially stable . This common financial instability could incline fintech companies to adopt cybersecurity solutions to make users more confident that their funds won't be lost in a breach. Specific systems that could see demand increases include antivirus software, firewalls , and intrusion detection systems.

Threats

Though the increasing prevalence of AI could benefit many companies held in IHAK, hackers are already finding ways to exploit this development. Developments in artificial intelligence could result in profits within industries such as cybersecurity, robotics, and healthcare. However, given AI's proportional capabilities to that of humans, hacking this system could be very destructive and hurt the profits and public image of cybersecurity.

Some hackers are capable of evolving at least as fast as technology, meaning that hackers could potentially find ways to maneuver around new cybersecurity systems. Hackers to this point could jeopardize the cybersecurity industry as well as other industries that benefit from its services. I covered in my piece on CIBR how an increasing number of hackers could benefit the cybersecurity industry, however, that could only be to some extent.

Conclusions

ETF Quality Opinion

I believe IHAK is capable of effectively profiting from developments in cybersecurity and information technology. However, this ETF is also currently overpriced and very dependent on income within a volatile sector.

ETF Investment Opinion

I rate IHAK a long-term hold. IHAK is currently somewhat overpriced and may therefore be unfavorable while interest rates are elevated. I believe that within the next few years, enterprises centered on fintech, robotics, and artificial intelligence may adopt new cybersecurity solutions. Though this prospect is attractive, potential buyers may derive greater benefit by waiting for a price drop in this ETF.

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