ETF Watch – Cybersecurity Takes Centre Stage

Cyber is one of the greatest dangers to businesses around the world according to a recent report from the JPMorgan International Council. “Cyber is the most dangerous weapon in the world – politically, economically and militarily,” said former US defence secretary Robert Gates, the vice chairman of the Council.

This is the wind below First Trust Nasdaq Cybersecurity ETF’s [CIBR] shares that have risen over 18% in the last year.

There have certainly been a number of costly attacks this year, from a ransomware hit on Colonial Pipeline causing gas shortages in the south-eastern United States to a cyberattack on Brazilian meat producer JBS [JBS], forcing it to shut down production in the US, Australia and Canada.

These weren’t just operational or reputational hits. Colonial paid a $4.4m ransom to its cyber criminals, while JBS shelled out $11m.

"Cyber attacks in 2021 grew in number and sophistication, demonstrating that both state actors with vast resources as well as criminal groups have the capacity to threaten critical infrastructure and ultimately national security," the JPMorgan International Council wrote.

The criminals are preying on the rise in remote working during the pandemic, as data is fired from home to home to office and, increasingly, on to the cloud. The rise of AI and robotics is also exposing businesses and governments to further cyber risk.

 

Market Growth

A recent report from ResearchandMarkets.com found that the Global Cyber Security Market Size was valued at $183.34bn in 2020 and is expected to reach $539.78bn in 2030.

Cyber and information security is ranked at the top of planned investments for 2022, with 66% of all respondents expecting to increase associated investments in the next year, according to a Gartner survey of 2,000 global chief information officers.

 

In addition, US President Biden’s $1trn infrastructure bill contains plans to beef up the US government’s cybersecurity spending by $1.9bn to help state and local authorities protect their critical buildings and utilities.

 

CIBR

This is likely to keep benefiting the First Trust Nasdaq Cybersecurity ETF, which tracks the performance of companies engaged in the cybersecurity segment of the technology and industrials sectors. It encompasses companies involved in the building, implementation and management of security protocols applied to private and public networks, computers and mobile devices to provide protection of the integrity of data and network operations.

The CIBR’s share price has climbed 18.32% in 2021 and has a year-to-date total daily return of 18.45% according to Yahoo Finance (as of 3 January’s close). It has net assets of $5.69bn.

It has 35 holdings, of which Cisco Systems [CSCO] has the biggest weighting with 6.88%, followed by Accenture [ACN] with 6.81%, Palo Alto Networks [PANW] with 5.94%, CrowdStrike Holdings [CRWD] with 5.46% and Cloudflare [NET] with 4.00% (as of 4 January).

 

Accenture and Palo boost

Shares in professional services giant Accenture have risen 53% this year helped by its rotation into “digital, cloud and security”.

Shares in Palo Alto have surged 55.6% this year with first quarter revenues up 32% to $1.2bn. It has been helped by demand for next-generation products such as Prisma Cloud securing cloud applications and Prisma Access to secure hybrid workforces.

According to a report in Investor’s Business Daily, Palo Alto has spent over $3bn on 10 acquisitions over the last three years. However, as reported by the Motley Fool, management have said that spree is over and that they foresee double-digit percentage growth in the years to come.

 

M&A

Jefferies analyst Brent Thrill certainly sees more M&A in the sector which could help bump up prices. "The cloud has disrupted everything, which presents both threat and opportunity," Thrill said in a recent note, reported by Investor’s Business Daily. "The cyber market is riper than ever for ongoing consolidation. Many smaller vendors are attempting to solve the same problems, larger vendors are looking to create security suites, and financing rates are at all-time lows."

“The cyber market is riper than ever for ongoing consolidation. Many smaller vendors are attempting to solve the same problems, larger vendors are looking to create security suites, and financing rates are at all-time lows” - Jefferies analyst Brent Thrill

 

There are challenges ahead with industries battered by the pandemic, such as aviation, potentially cutting software budgets. A more hawkish US Federal Reserve raising interest rates to combat inflation could also hit some of the growth stocks in this concentrated ETF.

However, the overall outlook of the CIBR ETF remains positive. There is danger out there and these are the stocks charged with protecting us from it.