Cybercrime continues to rise globally, leading to a heightened need for solutions to deal with the threat. MarketsandMarkets forecast the cybersecurity market will grow from $15.66 billion in 2018 to $31.82 billion by 2023, at a compound annual growth rate (CAGR) of 15.2%. For most investors who want to take advantage of this growing market, it makes sense to invest in a wide spectrum of cybersecurity stocks through exchange-traded funds (ETFs), versus just betting on one or two stocks.
There are few opportunities—four ETFs in total that track the sector—but only two ETFs are worth considering. The Trust NASDAQ Cybersecurity ETF (CIBR) and the ETFMG Prime Cyber Security ETF (HACK).
- Cybercrime is becoming more sophisticated, targeting individuals and businesses alike,
- The cybersecurity market is already a multi-billion industry, expected to double in just 5 years.
- Investors can gain access to this growing segment through the use of ETFs that invest in cybersecurity and related firms.
First Trust NASDAQ Cybersecurity ETF (CIBR)
The First Trust NASDAQ Cybersecurity ETF was launched in July 2015 to track the NASDAQ CTA Cyber Security Index, which focuses on companies building and managing the security protocols of private and public networks, computers, and mobile devices. The ETF has $1.27 billion in assets under management as of April 10, 2020.
Software companies dominate the ETF portfolio with 76.9% of its holdings, followed by the communications equipment sector at 8.7% of holdings. The top three holdings are Okta (OKTA) at 6.9%, Cisco Systems (CSCO) at 6.2%, and Splunk (SPLK) at 5.6%. The fund owns a total of 43 stocks. The dividend yield is 1%.
ETFMG Prime Cyber Security ETF (HACK)
The ETFMG Prime Cyber Security ETF (formerly the PureFunds ISE Cyber Security ETF) was launched in November 2014 to track the ISE Cyber Security Index, which focuses on companies developing hardware and software to protect data and those providing cybersecurity as a service.
Software and IT services companies are the biggest industry sector in the fund, representing 89.2% of its holdings, followed by communications equipment at 6.4%. The top three holdings are the ETFMG Sit Ultra Short ETF (VALT) at 4.1%, Cisco Systems at 4.1%, and Cloudfare (NET) at 3.9%. The fund's net assets are $1.81 billion, with 57 stocks in the portfolio. The dividend yield is 0.64%.
Differences Between the Two ETFs
There are strong similarities between these two ETFs, but there are also some subtle differences. The ETFMG Prime Cyber Security ETF, which is the more established fund, includes companies that have market capitalizations as low as $100 million, while the First Trust NASDAQ Cybersecurity ETF established a minimum market capitalization of $250 million for the companies in its portfolio.
Based on these criteria, the ETFMG Prime Cyber Security ETF is more likely to own faster-growing but riskier cybersecurity companies. In a strong market environment, the ETFMG Prime Cyber Security ETF could well outperform, making it a good candidate for investors looking for short-term plays. The First Trust NASDAQ Cybersecurity ETF has more exposure to larger companies that may be less volatile and could be a better option for investors with longer time horizons.