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Cybersecurity ETFs to Go a Long Way

Sanghamitra Saha
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The fear of cyber-attacks is rising rapidly and so is the demand for cyber security. As the ransomware called "WannaCry" stalled factories, hospitals, shops and schools in over 150 countries last May, computer systems from Ukraine to the United States were attacked by another ransomware, Petya, in June. Since then, one or other cyber incidents keep disrupting global stability (read: Cybersecurity ETFs Set to Rally After a Global Cyberattack).

In September 2017, Equifax, the credit reporting agency, announced a huge data breach which most likely compromised personal data of 143 million U.S. consumers. Most recently, the Pyeongchang Winter Olympics faced a similar issue. An unidentified actor hacked the organizing committee's servers recently, according to a report on Yonhap News. The attack led to a "malfunction of the internet protocol televisions," compelling the committee to shut down servers temporarily to avert further harm.

Recognizing the growing threat, President Trump's budget proposal kept aside about $80 billion for IT and cybersecurity funding, which represents a 5.2% uptick. In March, the administration will present exact metrics and plans for uplifting federal IT and making a modern data structure.

As per the source, the latest budget proposal assigns $210 million to the Technology Modernization Fund for the transition of federal IT from legacy systems to modern platforms. The budget also allots $45.8 billion for civilian IT funding in fiscal 2019, a moderate rise from fiscal 2018's $45.6 billion.

According to Gartner, global enterprise security spending will reach $96.3 billion in 2018 — marking 8% growth from the 2017 expected level of $89 billion.

ETFs in Focus

Given this situation, it is no wonder that cybersecurity companies and related ETFs should hit the roof in 2018. Currently, there are a couple of cyber security ETFs on investors’ radar:

ETFMG Prime Cyber Security ETF HACK

The fund provides global exposure to the cybersecurity industry comprising companies that offer hardware, software, consulting and services to counter cybercrime. It tracks the Prime Cyber Defense Index, holding 44 securities in its basket. It is well spread out across components with no stock accounting for more than 5.48% of the portfolio. From an industrial look, Systems Software accounts for nearly 58% of the portfolio, while communication equipment and IT Consulting & Other Services round off the top three (read: ETFs to Buy as Cisco Returns to Revenue Growth in 2 Years).

In terms of country exposure, U.S. firms take the top spot at 75%, followed by Israel (9.7%), United Kingdom (7.9%) and Japan (5.9%). The fund has amassed $1.21 billion in AUM and charges 60 bps in fees per year (read: Petya Malice Spilling Over: Buy Cybersecurity Stocks & ETFs).

First Trust NASDAQ CEA Cybersecurity ETF CIBR

This ETF has accumulated nearly $428.7 million in its asset base and charges 60 bps in annual fees. The fund follows the Nasdaq CTA Cybersecurity Index, which measures the performance of companies engaged in the cyber security segment of the technology and industrials sectors. In total, the product holds 33 stocks in its basket.

Further, it is skewed toward the software industry at 53.5%, while communications equipment round off the next spot with a 20.6% allocation. American firms account for 73% of CIBR, while United Kingdom, Israel, Netherlands and many others make up for a single-digit allocation.

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