Cybersecurity has become top of mind for many organizations as much of our interactions shift online because of COVID-19. The renewed focus on online safety is also a potential investment opportunity for financial advisors and investors looking for sectors that could withstand the current market volatility.
In recent weeks, many cybersecurity stocks and investment funds have been outperforming the broader markets, which have been whipsawed by economic uncertainty from the coronavirus. Specifically, some cybersecurity investments have seen either modest gains or single-digit losses year-to-date compared to double-digit declines for broader indexes such as the S&P/TSX Composite Index or the S&P 500.
Some advisors believe exchange-traded funds (ETFs) could be the best way to play the sector because of their diversified portfolios that include cybersecurity hardware, software and services companies. There’s also a growing need for corporations to spend more on various cybersecurity measures to protect their data and their brand.
“Cybersecurity is basically insurance to make sure your company remains viable for generations to come because one breach could throw it all out the window,” says John De Goey, portfolio manager at Wellington-Altus Private Wealth Inc. in Toronto.
Ernst & Young Global Ltd.'s (EY) EY Global Information Security Survey 2020 reports that 59 per cent of the 1,300 organizations surveyed worldwide last autumn have faced a “material or significant” cybersecurity incident in the previous 12 months, while 48 per cent of boards of directors believe that cyberattacks and data breaches will more than moderately impact their business in the next 12 months. About one-fifth of the attacks came from so-called “hacktivists” and almost a quarter came from organized crime groups. The report also states that 86 per cent of companies surveyed cited crisis prevention and compliance as top reasons to boost their cybersecurity spending.
One of the top cybersecurity ETFs is First Trust NASDAQ Cybersecurity ETF (CIBR-Q), with assets of US$1.4-billion and a management expense ratio (MER) 0.6 per cent. Some of its top holdings include information-technology (IT) services company Okta Inc. (OKTA-Q), communications equipment provider Cisco Systems Inc. (CSCO-Q) as well as software companies Splunk Inc. (SPLK-Q) and Palo Alto Networks Inc. (PANW-N). The ETF has lost 3.3 per cent year-to-date. (All performance numbers are total price returns as of April 20 from Morningstar Canada.)
Another is ETFMG Prime Cyber Security ETF (HACK-A), which includes security hardware and software companies as well as those providing cybersecurity as a service. This ETF, with assets under management (AUM) of US$1.3-billion and an MER of 0.6 per cent, has dropped 3 per cent so far this year.
iShares Cybersecurity and Tech ETF (IHAK-A) has a much-larger AUM of US$24.7-million and some of its top holdings include IT companies Citrix Systems Inc. (CTXS-Q), Docusign Inc. (DOCU-Q) and Akamai Technologies Inc. (AKAM-Q). Its MER is 0.47 per cent. The ETF has fallen 2.5 per cent year-to-date.
Evolve Cyber Security Index Hedged ETF (CYBR-T), Canada’s first cybersecurity ETF, has an AUM of $61.8-million, an MER of 0.63 per cent and has returned 3.35 per cent so far this year. The unhedged version (CYBR.B-T) has an AUM of about $16.4-million, an MER of 0.66 per cent and has returned 12.6 per cent year-to-date.
About 70 per cent of this ETF’s holdings include U.S.-based companies such as Okta, Fortinet Inc. (FTNT-Q) and Palo Alto Networks – alongside other names from Israel, China, Japan and Britain.
Evolve Funds Group Inc. chief executive Raj Lala says cybersecurity plays are largely recession-proof as companies ramp up spending on cybersecurity amid a steady increase in cyberattacks.
Mr. De Goey says a handful of his clients have asked to have this Evolve ETF in their portfolios as a broader play on the cybersecurity market.
“Cybersecurity is about as safe a place you can get in the technology space,” he says.
Mr. De Goey is considering adding the cybersecurity play to some of his other discretionary portfolios when the markets start to stabilize, using cash his firm now has sitting on the sidelines.
“I’m looking at what I can do when it’s safe to go back into the water, which I don’t think will be anytime soon,” he says. “When we finally look as though we’ve reached the bottom… this is the sort of thing I would look at because it’s safe and I think there are actually above-average returns.”
Mr. De Goey also looks at cybersecurity through the environmental, social and governance (ESG) lens, with a focus on governance. “If you want to talk about governance, any firm that doesn’t do a completely thorough job of maintaining cybersecurity will have their governance called into question,” he says.
Jeff Hull, senior financial advisor at Manulife Securities Inc. in Mississauga, says it’s not just companies that rely on cybersecurity, but also consumers who use connected technology such as smart doorbells, baby monitors and household appliances.
He says there’s a wide range of companies in the sector that offer different products and services – some that might not be as advanced or well used as others – and cautions advisors and investors to do their homework before buying.
“Dig deep and then deeper to make sure you and your client understand the cyber company [you’re] buying, why [you’re] buying that company and the truth behind the math because a lot of cyber companies have a high cash burn,” Mr. Hull says.