Cybersecurity Remains Interesting Industry Idea

Industry-level exposure can augment sector allocations and provide clients with a taste of thematic investing while potentially generating added upside.

Of course, the trick is identifying industries with legitimate staying power and not venturing off too deeply into the world of overly nuanced thematic fare. The latter is easy to do. Some clients are probably doing it on their own and that often leads them to chatting with advisors about how to best address industry investing in less risky fashion.

For many clients, approaching industry investing is best accomplished via exchange traded funds. Today, the ETF landscape is littered with hundreds of funds providing access to segments ranging from biotechnology to regional banks and newer concepts such as fintech, renewable energy and cybersecurity.

In the essence of October being National Cybersecurity Month – yes, there is such a thing – the cybersecurity investment thesis is worth revisiting. Actually, contrived month-long holidays aside, cybersecurity is always relevant and 2021 proves as much. Large-scale cyber attacks on the Colonial Pipeline, a meat-packing plant and an array of government agencies proves as much. Said another way, cybersecurity isn't a stretch as an investment thesis. It's exceedingly relevant and valid.

Talking Cybersecurity with Clients

For advisors, one of the benefits in discussing cyber security with clients is that it's one of the most easily explained thematic concepts. Additionally, it reaches close to home. Statistically speaking, there's a good chance an advisor has at least one client, if not more, that's been affected by identity theft.

Data from the Identity Theft Resource Center indicates there were 1,291 publicly reported data breaches in the U.S. through the first nine months of 2021,” according to First Trust, citing 24/7 Wall Street. “That already tops the 1,108 breaches for full-year 2020. Cyberattacks have been the primary cause of the compromised data, including 244 ransomware attacks. For comparative purposes, there were 241 ransomware attacks reported for the two-year period ended 2020.”

First Trust is the sponsor of the First Trust Nasdaq Cybersecurity ETF (NASDAQ:CIBR), the largest and oldest ETF in this category. There are several other funds from reputable issuers in this genre and those, along with CIBR, have favorable fundamentals.

“According to the FBI’s 2020 Internet Crime Report, the Bureau’s Internet Crime Complaint Center received a record number of complaints from the American public in 2020, totaling more than 791,000, with reported losses exceeding $4.1 billion,” notes Nasdaq research.

Of course, advisors should be telling clients why cybersecurity is an attractive thesis. It boils down to spending. Companies can no longer afford to skimp on cybersecurity expenditures. Nor can governments and governments have plenty of cash to spend to this effect.

According to research firm Gartner, cybersecurity was the top priority for new spending, with 61% of the more than 2,000 CIOs surveyed increasing investment in cyber/information security in 2021,” adds Nasdaq.

Cyber Interesection

Further validating the cybersecurity thesis is that it intersects with other disruptive technologies. In fact, as cyber crime escalates, new innovative technologies will be increasingly dependent on cybersecurity t safeguard corporate and customer data.

“Driven by the increasing use of e-commerce platforms and artificial intelligence, the cloud and, more broadly, the internet of things, the market shows no signs of slowing growth,” concludes Nasdaq. “In fact, the market is projected to grow from $165 billion in 2021 to $366 billion in 2028 at a compound annual growth rate of 12.0%.”

Bottom line: Cybersecurity has the upside potential clients crave in a thematic investment without much of the risk that comes along with venturing uncharted territory.

Related: Advisors, Get Ready. Bitcoin ETFs Are Coming.