The Best Cybersecurity ETF to Invest In – A Guide
We spend a lot of time looking at what investors are searching for to determine what themes they’re interested in. Some of the findings are insightful. For example, people always search for why a stock is falling, but never ask why it’s rising. That’s because the pain of losing is psychologically about twice as powerful as the pleasure of gaining. People also only want to invest in the best of everything. Never mind risk vs. reward, they want “the best.” Fortunately, we have MBAs on staff who learned in bee school how to tell other people what’s best for them.
A recent survey by Gallup showed that the one thing Americans are worried about above all else is cybersecurity. So, it makes sense that we might invest in cybersecurity because cybercrime isn’t going anywhere. Today, we’re going to look at eight cybersecurity ETFs and determine which one is “the best.”
|First Trust NASDAQ Cybersecurity ETF||CIBR||$3.54||0.60%|
|ETFMG Prime Cyber Security ETF||HACK||$2.06||0.60%|
|Global X Cybersecurity ETF||BUG||$0.85||0.50%|
|iShares Cybersecurity and Tech ETF||IHAK||$0.45||0.47%|
|WisdomTree Cybersecurity Fund||WCBR||$0.17||0.45%|
|Rize Cybersecurity and Data Privacy ETF||RCRS.F||$0.10||0.45%|
|ProShares Ultra Nasdaq Cybersecurity ETF||UCYB||$0.03||0.98%|
|Simplify Volt Cloud and Cybersecurity Disruption ETF||VCLO||$0.02||1.02%|
8 Cybersecurity ETFs
The first screen we’ll use is assets under management (AUM). This number reflects the amount of money that institutional and retail investors have committed to the ETF. The more AUM, the more money the ETF manager has generated, the better the ETF should perform. That’s not only because the franchise it belongs to will promote the cash cows, it’s because a rising tide lifts all boats. Nowhere is this more evident than at ARK Invest where their massive ETFs can drive sharp movements in the prices of the underlying stocks, which is not necessarily a good thing.
We can eliminate half our cybersecurity ETF contenders if we only consider ones with AUM greater than $500 million. While the iShares ETF misses the cutoff by about $50 million, we’ll consider it anyway because that franchise is notorious for building quality low-fee ETFs.
The 4 Biggest Cybersecurity ETFs
In order to determine why any given ETF holds the stocks that it does, you need to look at the index it tracks. Our four shortlisted cybersecurity ETFs are tracking the following indices:
- First Trust – The Nasdaq CTA Cybersecurity Index
- ETFMG – The Prime Cyber Defense Index
- Global X – Indxx Cybersecurity Index
- iShares – NYSE FactSet Global Cyber Security Index
All of these firms license indices from a third-party provider that they track with their ETFs. Before we start digging into index methodology documents, we can learn a lot by looking at the stocks contained within each of these ETFs and how they’re being weighted. The number of stocks it takes to make up 75% of each ETF’s weighting shows us how concentrated they are (the fewer stocks, the more concentrated).
- Global X – 14
- First Trust – 20
- iShares – 22
- ETFMG – 35
There are two schools of thought here regarding ETFs that have a smaller number of constituents, and consequently, have heavier weightings in fewer stocks.
- ETF concentration is good: One side might argue that a concentrated index is better. It gives the leaders more room to run. Think of NVIDIA in an AI index, or Illumina in a genomics index. The clear industry leaders should be given a meaningful weighting so they can blossom over time.
- ETF concentration is bad: The other side would argue that you want to place more bets. It’s the old adage that says, “if it’s the Microsoft, then all I need is a little – if it’s not, then I’m glad I only risked a little.” In order to discover the winners, you need a wide net.
We prefer concentrated ETFs because we’re dealing with narrow themes. The winners who come out ahead are likely to be obvious leaders with plenty of fuel in the tank for strong revenue growth into the future.
We also accept concentration as a necessary side effect of sticking with pure-play stocks. Most themes we look at don’t have that many pure-play stocks, so what index providers will often do is expand their net to include stocks that aren’t pure-play. That can often reduce volatility, but our first priority is always pure-play-ness. We need to be sure our money is on the right horse, regardless of how the race turns out.
Leading Cybersecurity Stocks
This next step – comparing top-ten constituents for each ETF – typically shows how little index providers can agree upon what stocks belong to any given theme. That in itself is a big red flag, which is why we’re digging into this stuff in the first place. We need to figure out which ETF provides the most pure-play exposure to cybersecurity stocks.
We took the top-ten stocks from all four ETFs and looked for common names. Only one stock existed in all four top-ten lists – Fortinet (FTNT) – a $32 billion cybersecurity company we looked at in our 2018 piece on 2 Cybersecurity Stocks Using Artificial Intelligence. Four stocks could be found across three of these top-ten lists. Each of the below cybersecurity stocks was found in at least three of the four indices:
|Company Name||Ticker||Market Cap (billions)||Super-Short Description|
|Fortinet||FTNT||32||Physical products such as firewalls, plus software and services|
|Crowdstrike||CRWD||46||Cloud workload and endpoint security, threat intelligence, and cyberattack response services|
|Palo Alto Networks||PANW||33||Provides cybersecurity platform solutions worldwide including firewall appliances and software|
|Proofpoint||PFPT||7||Protection and visibility for your greatest cybersecurity risk—|
the idiots that work for you.
|Zscaler||ZS||25||A cloud security company|
In other words, if we asked these four index providers which cybersecurity stocks they thought were leaders, these names would have come up the most. Consequently, we’d enjoy investing in an ETF that has lots of concentrated exposure to each of these five cybersecurity leaders. For each of the ETFs, we summed the weightings of these five stocks as follows:
- Global X – 35%
- iShares – 22%
- First Trust – 20%
- ETFMG – 11%
The Global X cybersecurity ETF has the most exposure to these five security leaders because they happen to be the top-5 companies they’re holding. That’s one of the things we like about the Global X ETF. It appears to include lots of pure-play cybersecurity companies. Both iShares and First Trust list Cisco as their largest holding. First Trust’s second and third picks are Accenture and Splunk. Below you can see the top-ten stocks across all four ETFs with the ones in common among them highlighted in green and yellow (red text shows names that were found in exactly two of the four ETFs).
At this point, we’re leaning towards the Global X ETF because it gives us concentrated exposure to five cybersecurity stocks that 3 out of 4 experts think we ought to be holding. Here are the remaining cybersecurity stocks in the top-10 for Global X which make up nearly 60% of the entire index’s total weighting.
|Company Name||Ticker||Market Cap (billions)||Super-Short Description|
|FireEye||FEYE||$5||Products include network, email, endpoint, and cloud security control products to detect/prevent threats|
|Okta||OKTA||$32||Provides identity management platform for enterprises|
|Varonis Systems||VRNS||$6||Software products and services that allow enterprises to manage, analyze, and secure enterprise data.|
|Check Point||CHKP||$16||A portfolio of network security, endpoint security, data security, and management solution|
|CyberArk Software||CYBR||$5||Develops, markets, and sales software-based security solutions and services|
Every one of these companies belongs in a collection of pure-play cybersecurity stocks. Contrast that to names like Juniper Networks, VMWare, or Akamai, all of which would not be considered pure-play cybersecurity stocks.
You’ll notice we haven’t mentioned returns yet. As they say, past performance is no indicator of future performance, but it’s still fun to look at how a theme has performed relative to the Nasdaq. Over the past five years, simply holding the popular Nasdaq ETF, QQQ, would have returned +185%. Those are incredible returns for an index, and a great deal of those gains can be explained away by the stellar performance of FAANG-type stocks. Here’s how our four cybersecurity ETFs performed over 1-Year and 5-year time frames.
|Inception Date||1-Year Return||5-Year Return|
Two of these cybersecurity ETFs – Global X and iShares – are relatively new, so there are no five-year returns to be calculated. As for the one-year returns, they’re consistently underwhelming across the board, but Rome wasn’t built in a day.
Which Cybersecurity ETF is The Best?
We’re not price-sensitive when it comes to fees, we’re most interested in how pure-play the basket of stocks is. Of the four ETFs we looked at, the largest, First Trust, seemed to deviate away the most from what a pure-play ETF might look like, followed by iShares. That would have left us with iShares and Global X, the former being one of the world’s most respected index franchises, and the latter being nearly twice its size as measured in AUM. The clincher is simply this. The top-ten stocks in the Global X cybersecurity ETF which make up 60% of the entire weightings are all pure-play cybersecurity firms. The same cannot be said for the rest of the ETFs we’ve talked about today.
The word “best” is extremely subjective. One man’s risky stock is another man’s conservative stock. This article shows you how we guided ourselves along the path of information to arrive at an informed decision. We think the Global X cybersecurity ETF is the best for us. It’s most closely aligned with our desire to always have pure-play exposure to any theme we’re targeting.
Having a repeatable investing methodology to use when you assess any tech theme for investability helps you make consistent decisions. We’re already holding two ETFs from Global X, and now we’re thinking about holding a third.
Are we going to finally open a position in the Global X Cybersecurity ETF? Or did we go all hero-or-zero on CrowdStrike? Become a Nanalyze Premium subscriber and find out.