2023-06-28 03:47:37 ET
Summary
- ETFMG Prime Cyber Security ETF provides investors with broad exposure to the US cybersecurity industry, focusing primarily on large-caps and mid-caps.
- The cybersecurity industry has favorable long-term growth projections, with the industry expected to grow at a CAGR of 22.5% from 2023-2028, reaching $148 billion by 2032.
- HACK seems to have hit its lowest point in late 2022 and has since been experiencing a subtle uptrend that mirrors the trajectory of the S&P 500.
Strategy
Launched and managed by ETF Managers Group LLC in 2014, the ETFMG Prime Cyber Security ETF ( HACK ) primarily invests in stocks of companies providing cybersecurity technology and services. The fund intentionally splits the industry into two segments: developers of cybersecurity hardware or software and providers of cybersecurity services. HACK invests in growth and value stocks of companies across diverse market capitalizations and seeks to track and replicate the performance of the Prime Cyber Defense Index. The fund has attained an AUM of over $1.4 billion and selects and weights its holdings through a market-cap weighting methodology. The index is reconstituted and rebalanced on a quarterly basis.
Holding Analysis
While HACK uses a market-cap weighting methodology to weigh its holdings, the fund manages to mitigate concentration risk within its top 10 holdings. These holdings constitute 45% of the fund's entire portfolio, and the highest weighted holding is capped at 5%. The weights of the rest of the top 10 holdings range from 4% to 5%. The fund invests in a total of 58 stocks and leans towards large-cap and mid-cap stocks. HACK allocates approximately 54% of its portfolio to large-cap holdings, 39% to mid-cap holdings, and only 6% to small-cap and micro-cap holdings. Although the fund focuses primarily on the United States, a little over 10% is allocated to stocks in the United Kingdom, Japan, Canada, Finland, Germany, and Sweden.
HACK's Performance Against S&P 500
If we compare HACK's total return to the S&P 500 in the past 5 years, it is evident that the fund has closely tracked the broader index from 2019 to late 2022. HACK even outperformed the S&P 500 at the beginning of 2021, but nearing the end of 2022, the fund seemed to take a harder hit than the index as a result of macroeconomic headwinds, such as higher inflation, debt tightening, and rising interest rates. Following its downtrend, the gap between the S&P 500 and HACK has been continuously widening, with the S&P 500 boasting a return rate that is more than double that of HACK's. However, it seems that the fund bottomed out in late 2022 and has been on a slight uptrend since late 2023. Given that HACK closely follows every peak and trough the S&P 500 experiences, I am confident that the fund will also mirror the S&P 500's uptrend moving forward.
Increasing Cost Of Cybercrime
As technology continues to develop and more people around the world become dependent on technology, there will also be an associated increase in global cybercrime. This year, there will be approximately 15 billion connected devices across the world, which is nearly double the world's population. With this large number of people dependent on technology, there are also high levels of cyber risk. Cybersecurity Ventures predicts that global cybercrime costs will grow by 15% year over year for the next few years, and it is projected to reach $10.5 trillion by 2025. Furthermore, Gartner analysts predict that in the next 2 years, 45% of organizations worldwide will be affected by cyberattacks in one way or another. As shown in the graph below by Statista, the estimated cost of cybercrime is projected to grow continuously over the next 5 years, reaching a high of $13.82 trillion by 2028.
Opportunities Within Cloud Security
A substantial portion of HACK's investments are in cybersecurity companies specializing in cloud security. These companies, including Palo Alto Networks ( PANW ), Zscaler ( ZS ), Cisco ( CSCO ), and Check Point Software Technologies ( CHKP ), represent roughly 20% of the fund's total portfolio and prominently feature in its top 10 holdings. Many other companies within HACK's portfolio also offer services focused on cloud security, among a multitude of other offerings. The sector is one of the fastest-growing within cybersecurity due to an increased need to protect data from theft and loss as more consumers and businesses move their operations to the cloud. This field was valued at over $20 billion in 2022, and projections for the cloud security market show promising growth in the coming decade, with forecasts predicting it will surpass $148 billion by 2032, with a compound annual growth rate ((CAGR)) of 22.5%.
While cloud security is a fast-growing sector within cybersecurity, it's important to note that the cybersecurity field as a whole has significant long-term growth potential. The cybersecurity market volume is expected to reach over $103 billion by 2028, growing at a CAGR of 8.53% from 2023-2028. However, according to the graph below, we can see that cyber solutions are growing at a much faster rate than security services. While it is excellent that the industry is focusing on developing more cyber solutions, it's equally important to address security services as this pertains more to the cybersecurity divisions within businesses themselves. Individual companies need to focus and invest more in cybersecurity to take advantage of the growing cyber solutions field.
Cybercrime Escalating Geo-Political Tensions
Recently, concerns over cybercrime from leading nations, namely Russia and China, have grown. Russia's Midnight Blizzard and China's Volt Typhoon are state-affiliated hacker groups that pose a significant cyber risk to the United States. Volt Typhoon, a Chinese hacking group , employs unique tactics for their cyberattacks on critical infrastructure, which pose a threat to the U.S. government and defense. Simultaneously, Microsoft has detected a surge in credential-stealing attacks by Russia's Midnight Blizzard . This group has effectively masked the source of its attacks, targeting governments, NGOs, and critical manufacturing sources. The increase in cybercrime from prominent world powers like Russia and China could signal increased geo-political tensions, especially with the United States. These groups often target government and defense institutions, introducing a new dimension of political conflict between nations.
Conclusion
Overall, cybersecurity is a critical industry, safeguarding all types of data against loss. As more businesses transition to digital platforms, this risk becomes increasingly prominent. As technology continues to develop, cybercrime is advancing at the same level. However, the industry has favorable long-term growth projections, as the cybersecurity industry is projected to grow at a CAGR of 22.5% from 2023-2028, reaching $148 billion by 2032. Moreover, HACK seems to have bottomed out in late 2022, similar to the S&P 500. The fund has been on a slight uptrend in the past few months, and I believe this will continue as long as the S&P 500's uptrend remains stable. With that in mind, I rate HACK as a Buy.
For further details see:
HACK: A Cybersecurity ETF That Has Likely Bottomed Out