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I understand what you might be thinking as you read this title: yet another author talking about the incredible opportunity behind a thematic ETF. You might ask yourself: "Why should I allocate part of my portfolio to cybersecurity when there isn't an ETF outperforming the broader Nasdaq Index?" That's a valid consideration. However, I strongly believe that the cybersecurity sector will capture a significant portion of the technology market in the future. Including an ETF like the iShares Cybersecurity and Tech ETF (NYSEARCA:IHAK) in a well-diversified portfolio could potentially generate alpha. There are several reasons for this, but the most significant ones are the widespread adoption of AI technology and the increasing use of digital payment methods.
IHAK: Why It's The Best Cybersecurity ETF On The Market
IHAK, an ETF managed by BlackRock under the iShares brand, is listed on NYSE Arca and has an expense ratio of 0.47%. It is likely a valuable addition for investors confident in the growth and adoption of AI technology. The ETF tracks the NYSE FactSet Global Cybersecurity Index and holds approximately 55 stocks. Although some might view this ETF as lacking diversification, it effectively achieves its goal of providing significant exposure to the cybersecurity sector. The limited diversification is justified by the relatively new and concentrated nature of the market. Despite this, IHAK includes both developed and emerging market companies, with nearly 70% of its composition being U.S. companies.
IHAK holdings (iShares)
A good analyst should prioritize variables beyond just performance. However, I recognize that performance often remains the primary focus. Therefore, I include a performance chart to illustrate how the IHAK ETF underperforms compared to the larger CIBR ETF.
So, why did I choose IHAK for my analysis instead of CIBR? In my opinion, IHAK offers better diversification; CIBR holds only around 34 companies. I chose to sacrifice some return to incorporate a better long-term solution in my portfolio. I won't delve into the specifics of the ETF here. For a more technical understanding of this instrument, I recommend reading this article.
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What Will Be The Role Of Cybersecurity In A World Governed By AI?
I would like to focus particularly on the cybersecurity sector because I think that IHAK could become one of the most demanded funds in the ETF space.
There are a few reasons, but the two most important ones are the growth rates of AI adoption and the continuous process of digitalizing money.
AI Adoption Growth
For the first part, I believe it's sufficient to focus on the industry's growth prospects. As you are likely aware, the artificial intelligence market has grown to over $184 billion in 2024, a significant increase of nearly $50 billion compared to 2023. This rapid growth is projected to continue, with the market expected to surpass $826 billion USD by 2030, resulting in a compound annual growth rate (CAGR) of 42.2% during the forecast period.
Now, how could AI impact the cyber crime industry? For cyber criminals, everything will become easier. We're talking not only about traditional malware and phishing attacks but also about more sophisticated and newer cyber crime strategies, such as the use of deepfake technology.
Let's delve into some specific numbers. Here are some compelling and relevant statistics:
Global damages from cybercrime are projected to reach $10.5 trillion annually by 2025. This forecast anticipates a 15% increase in global cybercrime costs over the coming year, which unfortunately represents one of the largest wealth transfers in history.
Cybersecurity Ventures estimates that global spending on cybersecurity will cumulatively exceed $1.75 trillion from 2021 to 2025.
Furthermore, according to Statista - The Statistics Portal, revenues in the cybersecurity market will reach $185.70 billion in 2024, with an annual growth rate (CAGR 2024-2029) of 7.92% expected by 2029, primarily driven by revenue generation in the United States.
Cybercrime Cost (statista.com)
Digital Money Transaction
Dear readers, I want to remind you of an important fact, which you may already be aware of. The world has undergone significant changes in these past 5 post-pandemic years: 90% of the global population is expected to be online by 2030. In such a world, the payment system will shift entirely to digital. Let's face it, believing that the financial services sector will remain unchanged is, in my opinion, unrealistic.
As always, let the data speak for themselves.
According to the Worldpay Global Payments Report, in 2023, more than 75% of consumers regularly use online payments for retail purchases.
Were you surprised? Check out this information from statista.com
Revenue in the Cybersecurity market is projected to reach US$185.70bn in 2024 and is expected to show an annual growth rate (CAGR 2024-2029) of 7.92%, resulting in a market volume of US$271.90bn by 2029.
Then, I would like to add some additional information related to the cryptocurrency world. As you may already understand, I enjoy closely following developments in this sector. In my opinion, blockchain, and to some extent, the world of cryptocurrency, will be disruptive.
Let's explore some interesting statistics to include in our analysis:
I prefer using statista.com as a source, and in this case, I have come across some intriguing statistics: Did you know that in 2023, the number of cryptocurrency users increased by 18% compared to the previous year? But that's not all: According to data from blockchain.com, the volume of blockchain transactions grew by 42% compared to the previous year.
It's important to note that I'm not suggesting that decentralized finance (Defi) will replace our monetary system or anything overly conspiratorial or apocalyptic. However, I do urge you to be aware of this: People are increasingly enthusiastic about using blockchain technology.
Of course, this trend will inevitably introduce new risks for the cybersecurity world. Indeed, according to Cybersecurity Ventures, these trends cost $17.5 billion in 2021 and are expected to grow by 15% annually as the cryptocurrency market continues to expand.
What Are The Risks Associated With This Investment?
In my opinion, risk should be expressed in terms of opportunity cost. To illustrate this, I created a performance chart comparing the Invesco NASDAQ 100 ETF (QQQM) and the IHAK ETF. You can clearly see a performance spread of around 30%. So, is it better to invest in the technology sector for the long term or to try to "bet" on the outperformance of the cybersecurity sector? Analytically speaking, I don't believe cybersecurity firms will achieve higher profit margins than direct technology firms. As we all know, stock market prices follow corporate balance sheets. Therefore, the real question becomes: why should I allocate part of my capital to this ETF when an ETF on the Nasdaq will likely outperform?
Well, I think there are two main considerations:
- Risk premium: Even though I believe the Nasdaq will outperform the IHAK ETF in the long term, the market might currently underestimate the disruptive need for new cybersecurity features that will likely emerge in the future.
- Diversification strategy: The IHAK ETF represents the core of the cybersecurity sector, with only about 50 stocks in its holdings. From a portfolio management perspective, it could be an excellent way to gain exposure to a sector that will become increasingly important in the future but is currently underrepresented in the Nasdaq composition.
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Conclusion
The proliferation of AI technology and the increasing adoption of digital payment methods are expected to accelerate the growth of the cybersecurity sector, potentially driving up stock prices. In conclusion, while the growth of cybersecurity is closely tied to technological advancements, having direct exposure to this sector through the IHAK ETF could potentially provide significant alpha in a long-term portfolio.
