The cybersecurity industry is projected to boom. These ETFs aim to cash in on that

“That’s every company’s worst nightmare to go through,” he said.

As cybercrimes become more sophisticated, so too is the cybersecurity industry, which is projected to see an increase in global spending from US$172 billion in 2023 to more than US$420 billion in 2030, according to Fortune Business Insights.

Meanwhile, ETF providers are looking to cash in on this growth and bring investors along with them.

“What I really like a lot about cybersecurity is it’s one of the few areas that has a non-discretionary spend attached to it,” Lala said.

“Whether we’re in a recessionary environment or a non-recessionary environment, companies can’t afford to cut their spending. They have to continuously increase their spending on cybersecurity to make sure that they’re keeping their data safe from cybercriminals.”

Canadian cybersecurity ETFs

The first cybersecurity ETF to trade in Canada was the Evolve Cyber Security Index Fund (TSX: CYBR), in September 2017. It also was the first fund launched by the firm.

The $180.5-million fund, which has a 0.4% management fee, invests in global companies involved in the cybersecurity industry. Its holdings include CrowdStrike Holdings Inc., Trend Micro Inc. and Blackberry Ltd.

“About 75% of all the cybersecurity work that’s performed out there is actually outsourced,” Lala said.

“If you’re going to outsource your cybersecurity function, I’m pretty sure if you’re a big bank or a Fortune 500 company, you’re not going to outsource it to some mom-and-pop shop cybersecurity firm. You’re going to want to outsource it to the big, reputable, publicly listed, regulated cybersecurity companies. And [those are] the companies that make up our fund.”

Since its inception, the Evolve ETF has had a 12% annualized return, Lala noted. Different versions of the fund include Canadian-dollar hedged and unhedged versions, a U.S.-dollar version and two mutual funds (Class A and Class F).

“I always say it’s investing in the good guys because they’re protecting our data — so really, the companies that are providing the hardware, software and consulting protection to Fortune 500 companies, government agencies, Canadian banks, global banks and so on,” Lala said.

The Global X Cybersecurity Index ETF (TSX: HBUG) is another option. The $2.8-million fund launched in December 2021 and has a 0.55% management expense ratio.

The fund seeks to replicate the performance of the Indxx Cybersecurity Index by investing primarily in the Global X Cybersecurity ETF (Nasdaq: BUG). Securities in the underlying index include Palo Alto Networks Inc., Zscaler Inc. and Darktrace.

Approximately 30% of the ETF is allocated to non-North American securities, which reflects the global nature of the cybersecurity industry, said Alex Smahtin, senior analyst of investment management at Global X Canada in Toronto.

This international exposure also helps combat the home bias investors might have, he added.

Data from Statista, the International Monetary Fund and FBI show that cybercrime is a growing threat, with the global cost of online criminal acts expected to surge to US$23.8 trillion by 2027, up from US$8.4 trillion in 2022.

The increasing frequency and severity of cybercrimes will coincide with an increase in regulatory scrutiny around protecting people’s data and cybersecurity, Smahtin said.

“It’s an industry that is understandably poised to grow alongside the tech industry at large,” he added.

Other cybersecurity ETFs in Canada that aim to embrace this growth include the iShares Cybersecurity and Tech Index ETF (TSX: XHAK) and First Trust Nasdaq Cybersecurity ETF (TSX: CIBR).

Who should invest in cybersecurity ETFs?

Investing in cybersecurity ETFs can help those looking to diversify their technology exposure “rather than being just exposed to, say, the big AI names,” Smahtin said.

These funds are unlikely to be a large chunk of an investor’s equity allocation, but may interest people looking to invest in a subsector of the technology industry that can be categorized as an essential service, Lala said.

As well, he said cybersecurity funds may be suitable for investors looking for an area of the market that’s likely to have a lot of merger and acquisition activity, which he expects “there will be, especially [because] big tech firms will probably acquire some of these cybersecurity companies.”

Both Smahtin and Lala said investing in cybersecurity ETF is a safer bet than “just identifying one stock to be a proxy for an entire industry.”

“I think it makes a lot more sense to use an ETF where you’ve got exposure to the 45–50 companies that are within that subsector, because what ends up happening oftentimes in a sector like this is you have massive performance variance across the stocks,” Lala said.

Gimmicky or a success?

The volume of thematic funds — encompassing everything from clean energy to artificial intelligence — ballooned at the onset of the Covid-19 pandemic.

They have since fallen out of favour, Bloomberg said in a May report, noting that investors have already pulled nearly US$4 billion so far this year from thematic ETFs, after withdrawing US$4.6 billion from these funds as a whole in 2023.

“These funds attempt to harness secular growth themes ranging from artificial intelligence to Generation Z,” Morningstar researchers wrote in a 2022 report analyzing the global thematic fund landscape. “Some have delivered phenomenal performance. Others have been duds.”

The researchers added that the supply of these “niche and often gimmicky funds” ramped up from early 2020 until 2022, leading to investor demand for clarity and guidance to increase commensurately.

Asked about this characterization of thematic funds, Lala said sometimes thematic funds can be gimmicky because “people will put a label on the product, but really just give you what you already own in your traditional portfolios.”

However, he said when Evolve launches thematic ETFs, “we always try to be very true to our theme and give investors exposure specifically targeted at that theme.”

“But, having said all of that, I agree these thematic ETFs should not make up 30, 40% of your equity portfolio,” Lala said.

“It shouldn’t be core. It should be more of a satellite position.”

Smahtin said he wouldn’t necessarily call thematic ETFs gimmicky and that it’s up to each individual investor to decide the end goal of their portfolio.

“I think that ultimately a case can be made for a thematic fund in a given investor’s portfolio. And I think it ultimately comes down to the investment objectives and risk tolerance levels of the investor.”