A slew of high profile data security breaches in recent years coupled with a slew of forecasts calling for exponential spending increases are among the factors highlighting cybersecurity investments.
Unfortunately, the range of cybersecurity threats is nearly limitless. Cyber threats range from hackers pilfering cryptocurrency from web-based wallets to social media companies failing to guard users’ data. More sophisticated cyber threats include cyber terrorism, cyber warfare and corporate espionage.
Traditionally, access to cybersecurity investments has come via three forms: Individual stocks, diversified technology funds with minor cybersecurity exposure or, more recently, exchange traded funds (ETFs) explicitly dedicated to the cybersecurity theme. Each of those options has drawbacks.
In the case of old guard technology sector index funds, those products are usually heavily allocated to the largest technology companies, such as Apple Inc. (AAPL) and Microsoft Corp. (MSFT). That diminishes those funds’ cybersecurity exposure. Conversely, owning individual cybersecurity stocks or funds dedicated to that theme is not for every investor. For the three years ended Nov. 6, 2018, the Nasdaq CTA Cybersecurity Index trailed the Nasdaq-100 Index by nearly 1,000 basis points while being about 100 basis points more volatile on an annualized basis.
While some cybersecurity investments cannot be considered “perfect,” the industry’s growth trajectory remains compelling. The 2018 BDO Cyber Governance Survey, conducted annually by the BDO Center for Corporate Governance and Financial Reporting, highlights the increasing awareness of cybersecurity needs among board members at major public companies.
“The cadence of reporting on cybersecurity is increasing, with nearly one-third (32 percent)
of board members saying they are briefed at least quarterly on cybersecurity, while 54 percent are briefed at least annually,” according to the survey.1
More relevant to investors is that, as the chart below indicates, companies are upping their spending on cybersecurity.
BDO CENTER 2018
The cybersecurity investment thesis has an important backstop: government spending. Around the world, governments large and small are boosting cybersecurity spending. Here in the U.S., the Defense Department’s cybersecurity appetite is expected to experience a growth rate of 3% annually through 2023, reports National Defense, citing Frost & Sullivan Research.2
While $4.3 billion may not sound like much money for the Pentagon, that figure does not include other cybersecurity spending plans that appear in other budgets and the figure is nowhere close to the overall sum Uncle Sam is devoting to cybersecurity measures.
“Worldwide spending on the technologies and services that enable the digital transformation (DX) of business practices, products, and organizations is forecast to be more than $1.1 trillion in 2018, an increase of 16.8% over the $958 billion spent in 2017,” according to research firm IDC.3
Cybersecurity is intimately linked to other fast-growing technological themes, but many traditional technology investments do not adequately reflect those relationships. For instance, artificial intelligence (AI) and machine learning can help cybersecurity platforms automate threat detection and enhance those detection capabilities relative to non-AI software programs.
Additionally, a growing number of large companies with footprints in the cloud computing arena are helping clients bolster data management capabilities and security. With the Internet of Things (IoT) market growing and becoming more mainstream by the day, increased cybersecurity standards are viewed as crucial to the market’s adoption and growth.4
The ALPS Disruptive Technologies ETF (DTEC) features equal-weight exposure to 10 disruptive technology themes, including AI, cloud computing, IoT and, of course, cybersecurity. DTEC’s approximately 10% weight to cybersecurity stocks is among the highest for funds that are not explicitly devoted to this market segment.
1 Source: BDO survey https://www.bdo.com/getattachment/77997332-8c7b-4103-b948-631a89f82a90/attachment.aspx?2018_BDO-Cyber-Governance-Survey-(1).pdf
2 Source: National Defense Nov. 7, 2018 http://www.nationaldefensemagazine.org/articles/2018/11/7/cybersecurity-market-poised-for-further-growth
3 Source: IDC June 12, 2018 https://www.idc.com/getdoc.jsp?containerId=prUS43979618
4 Source: IOT For All Sept. 7, 2018 https://www.iotforall.com/iot-cybersecurity-challenges/
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Disruptive Technology Theme Risk. Companies that the Index Provider believes are developing disruptive technologies may not in fact do so or may not be able to capitalize on those technologies. Companies that develop disruptive technologies may face political, legal or regulatory challenges. Such companies may also be exposed to risks applicable to industries or sectors other than the disruptive technology Theme for which they are chosen and may underperform relative to other companies that are also focused on a particular Theme.
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Companies that the Index Provider believes are developing disruptive technologies may not in fact do so or may not be able to capitalize on those technologies. Companies that develop disruptive technologies may face political, legal or regulatory challenges. Such companies may also be exposed to risks applicable to industries or sectors other than the disruptive technology Theme for which they are chosen and may underperform relative to other companies that are also focused on a particular Theme.
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Indxx Disruptive Technologies Index (IDTEC): based around companies that enter traditional markets with new digital forms of production and distribution, are likely to disrupt an existing market and value network, displace established market leading firms, products and alliances and increasingly gain market share.
Nasdaq CTA Cybersecurity Index – is designed to track the performance of companies engaged in the cyber security segment of the technology and industrial sectors. It includes companies primarily involved in the building, implementation and mgmt. of security protocols applied to private and public networks, computers and mobile devices in order to provide protection of the integrity operations.
Nasdaq 100 Index – The NASDAQ-100 Index is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ. No security can have more than a 24% weighting.
One may not invest directly in the index.
Artificial intelligence (AI) is the intelligence exhibited by machines or software. One of the central problems (or goals) of AI research include natural language processing (communication).
One may not invest directly in the index.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Disruptive Technologies ETF.
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