- BUG is one of my favorite ETFs to invest in during these times.
- The companies in the ETF capitalize on the challenges of cybersecurity.
- With Covid being less relevant, investors should consider buying on dips.
The new Omicron variant is increasing the level of uncertainty in the public. Pfizer and Moderna are still examining the efficacy of their vaccine against this new variant, and in the meantime, the governments are taking measures to lower its spread especially from African countries. Every day that passes, we hear about another country that identified a case, and the market is eager for some certainty regarding the vaccines.
In the meantime, the volatility index has jumped over the last week of November. The VXX (VXX) ETF has jumped over 20% as the level of uncertainty has affected the market. Investors look for stability and the new variant may affect the performance of businesses. Until more is known regarding Omicron, the market may suffer from higher volatility.
As a long-term investor, I am not paying a lot of attention to short-term volatility. However, I do pay attention to the possibility of companies being hurt by the changing business environment as it may affect their fundamentals and the "real" valuation. Therefore, in times like these, I am looking for sectors and businesses that will be less affected by the Covid challenge.
One of these sectors is the IT sector and cybersecurity in particular. Companies require, and will continue to require, means to protect their digital assets. While governments protect physical assets like factories and offices, the cyber realm is everywhere, and specific companies develop products and services aimed at protecting our assets in this realm. Global X Cybersecurity ETF (NASDAQ:BUG) is an ETF that holds companies in this industry.
According to Seeking Alpha's overview, Global X Funds - Global X Cybersecurity ETF is an ETF launched and managed by Global X Management Company LLC. It invests in the public equity markets of the global region. It invests in stocks of companies operating across development and management of security protocols preventing intrusion and attacks to systems, networks, applications, computers, and mobile devices: collectively, cybersecurity companies.
Why BUG is good
Digital transformation is a long process that is accelerating. Companies are transferring more and more assets into the cloud. The use of on-premise hardware to hold information is dwindling and more data and assets like websites, apps, etc. are being transferred directly to the cloud. As more data and more assets are transferred, there is a growing need for security applications to protect this data.
Personal users are also transferring their data slowly and steadily to the cloud. If in the past we have seen computers being sold with 1TB of storage, today we see the storage decreasing as home users are also operating mainly in the cloud. Their data is in Google Drive, Dropbox, etc, and they connect to their cloud to work remotely.
As individuals are working remotely and storing their data online, we see an increase in the number of attacks against home users. Phishing attempts have become very prevalent and whereas in the past, viruses were made to damage data, today security breaches are used for financial gains mainly against less aware populations like the elderly.
Companies that are now using the cloud are also under more severe attacks. The data is very valuable, and we see more security breaches attempting to gain access to this sensitive data. Another form of popular attack is ransomware where a group of hackers won't allow you to access your data unless you pay them.
The increase in the number of digital assets has led to increased interest by attackers. We see more attackers and they are becoming more and more sophisticated. The combination of more assets online, remote access to these assets by workers from their homes, and increased interest from cyber attackers is making the companies in the BUG ETF extremely attractive.
Those companies are spread across the entire value chain. From cyber threat intelligence to services aimed at blocking intruders to the management of the system after the attack has occurred. The ETF is not only diversified along the value chain, but it also diversified among clients. From fully digitalized clients on the cloud to commercial hybrid clients and home users' clients.
Covid accelerates digital transformation as companies have to learn to work remotely with their employees and their clients. We see how the slowest organizations, even government organizations are forced to transform themselves and become more digitalized. With clients and employees preferring to interact online, the trend is accelerating.
It is important to note that the digital trends did not start due to Covid, but only accelerated because of the virus. Every time there is a variant spreading as we see right now, we will see another push towards digitalization as companies are willing to be prepared. The preparation will include buying products and services from companies in the BUG ETF.
The spread of Covid has a direct effect on the sales of cybersecurity products. It increases the demand for these products as more and more companies increase their online activities. Therefore, when cyber security stocks decline with the rest of the market due to Covid concerns, I find that to represent an opportunity. As the ETF is currently almost 20% below its all-time high while the demand is on the rise, investors should consider exposing themselves to these companies.
As I mentioned, the companies that are included in the ETF are extremely diversified. Palo Alto (PANW) for example offers firewalls and cybersecurity software in public or private cloud environments, as a virtual or a physical appliance. It also provides subscription services covering the areas of threat prevention, malware, and persistent threats.
The second highest holding is Zscaler (ZS) which focuses on cloud and data centers security. It provides users, servers, and IoT devices with secure access to externally managed applications, including SAAS applications and Internet destinations. Zscaler is much smaller than Palo Alto and has a different focus. The ETF gains a very broad exposure.
The ETF also has exposure to Avast (OTCPK:AVASF) and NortonLifeLock (NLOK). These two companies are now merging to create a large cybersecurity company that will be a leading cybersecurity software provider. These companies have a significant presence in households and this merger will allow them to expand their value proposition to other users.
BUG offers investors great exposure to a fast-growing industry. The cybersecurity industry is growing at a much faster pace than the economy as the demand for security applications grows due to both the increase in the number of online assets and the increase in the number of attackers. Every new Covid variant is further increasing the need for digital transformation which accelerates the process.
Therefore, I believe that BUG can be a core position in every long-term portfolio. The trends are here to stay and investors can buy BUG to gain exposure to the new businesses that are formed as more companies offer more cybersecurity solutions.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of BUG either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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