Will Soaring Cybercrime Drive Gains for the Global X Cybersecurity ETF?

The Global X Cybersecurity ETF is up 20.7% year-to-date, with spending in the space set to grow on the back of the increasing threat of cybercrime. Several of the fund’s holdings are in the cloud computing segment, an area that is expected to drive growth in the coming years.

• The Global X Cybersecurity ETF closed 8 September, up 20.7% year-to-date.
• Spending on cybersecurity worldwide is forecast to exceed $219bn in 2023, up 12% from 2022.
• Damage from cyberattacks is set to reach $10.5trn by 2025, according to McKinsey.

The Global X Cybersecurity ETF [BUG] closed on 8 September, up 20.7% year-to-date and up 6.5% over the course of the month. The fund’s continued positive performance could reflect investors’ confidence in the integral role cybersecurity technologies will play as more companies and organisations digitise their offerings and thus become more vulnerable to cyberattacks.

Indeed, spending on cybersecurity worldwide is forecast to exceed $219bn in 2023, up 12% from the previous year and outpacing overall information technology (IT) spending, according to a March report from the International Data Centre (IDC).

Software is expected to account for nearly half of all spending, at 47%, followed by services (39%) and hardware (13%). This trend is set to continue, with an October 2022 report from Gartner projecting global cybersecurity spending could reach $415bn by 2030.

“Almost all industries and company size segments will see low double-digit growth through 2026, driven by the expansion of cloud and container deployments, the need to secure remote access to resources and the compliance requirements of privacy and data protection legislation,” Serena Da Rold, Associate Research Director at IDC Data & Analytics, said in a statement in March. Four sectors — banking, discrete manufacturing, professional services and federal/central government — are expected to account for more than one-third of spending.

Drivers of growth

The sustained focus on cybersecurity could bode well for BUG’s holdings, which are highly concentrated in the tech segment. More than half (53.8%) of the ETF’s assets were in packaged software as of 31 August, with the other large contributors being IT services (21.4%), computer communications (15.8%), and internet software and services (8.3%).

Many of BUG’s holdings are poised to benefit should IDC’s projections come to fruition. The largest holding, Zscaler [ZS], provides cloud cybersecurity services and accounted for 9.1% of the fund’s holdings as of 8 September.

The company’s fourth quarter (Q4) 2023 earnings, released on 6 September, showed revenue of $455m, outpacing the Zacks Consensus Estimate by 5.7% and up 43.1% year-on-year. Zscaler’s share price is up 43.7% year-to-date.

Generative artificial intelligence (AI) and the associated risk of data loss was one area that the company identified for future growth. “To address these concerns, we already delivered data protection capabilities that prevent the leakage of sensitive data through AI prompts”, Jay Chaudhry, Founder, CEO and Chairman of Zscaler, said on the earnings call. “AI-driven cyber insights and prevention have the potential to add tremendous customer value,” he added.

The fund’s second-largest holding, CrowdStrike [CRWD], reported quarterly revenue of $731.2m at the end of August, up 36.7% year-on-year. Its share price is up 59.6% year-to-date.

Accounting for 6.9% of BUG’s portfolio is its third-largest holding, Palo Alto Networks [PANW], which also reported growth over the summer. Revenue for the quarter ending 31 July was $2bn, up 26% year-on-year. Zscaler’s stock is up 78.3% year-to-date.

Outlook for the Global X Cybersecurity ETF

After hitting a record of $22.8bn in 2021, venture capital investment in cybersecurity fell by 32.9% to $15.3bn in 2022, which Crunchbase, the publisher of the data, attributed to a significant drop in large growth rounds. This trend has continued into 2023, with cybersecurity investment down 58% year-on-year in Q1 and 63% in Q2.

This belies opportunities in the cybersecurity space. According to an October 2022 report from McKinsey, damage from cyberattacks could cost an annual $10.5trn by 2025 — 300% more than in 2015. While the global market was valued at $150bn in 2021, available cybersecurity solutions only meet the needs of approximately 10% of it, bringing total opportunities in the fully addressable market to as much as $2trn.

“Such a massive delta requires providers and investors to ‘unlock’ more impact with customers by better meeting the needs of underserved segments, continuously improving technology and reducing complexity,” wrote the authors, led by Bharath Aiyer, Associate Partner at McKinsey.

Out of 39 analysts providing 12-month price targets to Refinitiv on Zscaler shares, the median estimate of $185.00 represents 15.1% potential upside from its most recent closing price of $160.77.

The median estimate among 43 analysts for CrowdStrike shares is $180.00, representing a 7.1% upside from the recent closing price of $168.09.