Mar 07, 2018
I’m sure you are familiar with the rising threat of identity theft and cyber hacks, whether from personal experience (there were over 15 million identity theft cases reported in 2016) or the regular rotation of national headlines. From Target (TGT) to Home Depot (HD) to Yahoo to the U.S. government to one of the country’s largest credit bureaus, we hear all too often of hackers accessing our sensitive personal data.
And that’s not even considering things like the WannaCry virus nearly a year ago that impacted hospitals, banks, factories, schools and more.
Unfortunately, one of the realities of the NexGen technology revolution is that hackers have remained a step ahead of most companies despite their best security efforts. Many well-respected business people, investors and government officials have referred to these attacks as the biggest threat to mankind. And as technology connects more everyday devices and defense systems, the demand for innovation to fight off hackers will grow exponentially.
It’s not surprising that the cybersecurity market is estimated to grow 70% from $137 billion last year to $232 billion by 2022. Global spending is expected to exceed $1 trillion by 2021. If that seems high, consider that there were 3.8 billion internet users in 2017 (51% of the world’s population of 7 billion). By 2030, there will be 8.5 billion people on the planet and over 75% of them will be online. To cyber criminals, that represents billions more potential victims.
This kind of threat and the huge efforts to combat it open the door for a variety of NexGen opportunities. This is too powerful of a trend for investors to ignore, and for those getting started in it, I recommend you look at exchange-traded funds (ETFs) that give you exposure to virtually the entire sector. (From there, you may want to layer on individual stocks as profit multipliers that boost overall return, which is one of our strategies in my NexGen Profit Multiplier service.)
For today, let’s talk about those ETFs. The cybersecurity industry has two to choose from with identical annual expense ratios, but the composition of the portfolios varies a little bit. The ETFMG Prime Cyber Security ETF (HACK) was the first one created for the sector and has more than $1.2 billion in assets under management. The top holdings are mainly mid-cap U.S. stocks (average market cap of $9 billion) with about 60% based in the systems software sector.
HACK is up 18% over the last 12 months and trading at all-time highs. What is even more impressive about the action is that after rallying to a new high post-correction, the ETF pulled back and held the breakout level before a new breakout this week.
The other option is First Trust NASDAQ Cybersecurity ETF (CIBR), which has $435 million in assets. Half the portfolio is in software stocks with another 20% in communication equipment, and it is also heavily weighted in mid-cap stocks. However, CIBR’s top 10 holdings have a bit more exposure to large-cap names. For example, its second-biggest position at 6.94% is Cisco Systems (CSCO), which has a $213 billion market cap. CSCO is also part of HACK but it is the eighth-largest holding at a lesser weighting of 5.12%.
CIBR is up 22% in the last 12 months and also trading at all-time highs. The chart in 2018 is similar to HACK in that the three-day pullback in February did not breach support and a new high followed.
When it comes to ETFs, it’s critical that you look under the hood to know what kind of engine each one has. That’s true with cybersecurity as well, as both HACK and CIBR include many of the same names. In that case, my analysis leans more heavily on the actual weighting. Here’s a look at the top 10 holdings in each.
Assuming cybersecurity growth continues in the way the numbers suggest, a rising tide will likely keep pushing both ETFs to new highs. But to really zero in on the stronger opportunity, I’ll keep my analysis focused on the individual holdings to determine which one will be in the better position to profit in the years ahead.
Cybersecurity stocks are also prone to swings, so you do want to be careful with your entry and exit points. That’s where the charts are such a valuable asset, even if you have a longer-term investing horizon. Right now, I’m watching both of these ETFs for optimum buying opportunities, and I’ll let my subscribers know as soon as we get one. If you want to be alerted as well, click here to learn more.
Don't miss out on the incredible NextGen Revolution that is sweeping across our nation. Gain access to the most powerful market insights and stock advice from Matt McCall absolutely FREE. Join Today!