(16 July 2021) Threat to Cybersecurity? Investment Strategy in US ETFs

Written by: Mutsumi Kagawa

1. Returns of the growth stocks have overtaken value stocks in the US marker
In the US market, the S&P 500 index hit record high on July 12. The June CPI (Consumer Price Index) announced on the 13th was +5.4% year-on-year, exceeding market expectations, and long-term interest rates rebounded slightly. Yields of the 10-year government bonds, which had fallen to the 1.2% range on July 8, rose to the 1.4% range (13th). It is largely presumed that the increase of the inflation rate due to economic normalization and pent-up demand will peak in the middle of the year. FRB Chairman Jerome Powell stated on the 14th that “the current significant rise in prices is temporary, as inflation will decline once supply constraints and labor shortages are resolved”. Regarding the stock market, the stability of long-term interest rates since the beginning of May had growth stocks dominate market trading.

 

<Chart 1: Depicts The Changes Of Both The US And Japanese Markets>

(Source) Created by Rakuten Securities, Inc. from Bloomberg (July 14, 2021)

 

In the US market, gains from growth stocks clearly outpaced the value stocks. GAFAM (Top 5 stocks in Nasdaq Composite Index and S&P 500 Index)’s solid performances have contributed to this result. Recovery of growth stocks (year-to-date +17.5%) is driving the S&P 500 Index higher (year-to-date +16.5%). Currently, the US market is looking for guidance from the announcement of corporate financial results amid the long-term interest rates coupled with the risk of the highly contagious Delta strain.

 

2. Risks of cybersecurity have posed a social and economic threat

The world is wary of the increasing cyberattacks on individuals and organizations (corporations, ministries and agencies). A cyberattack is a criminal act of falsifying, leaking or exploiting data via a network targeting PCs, servers, websites, etc. It is also aimed to cause disadvantage or confusion on the victims to obtain corporate information and/or private information for trading. In May this year, Colonial Pipeline, the largest oil pipeline company in the United States, was forced to shut down for 6 days after a ransomware attack (a cyberattack demanding for ransom). This has caused the gasoline price increase due to the disruption on the supply side across the United States.  It was reported that Colonial Pipeline had paid a ransom of about 5 million USD (WSJ and Bloomberg). Regarding repeated ransomware attacks on US companies, President Biden has demanded that Russian President Vladimir Putin to crack down on Russian-based cybercriminals”. In addition to these, according to the “2021 Top 10 Information Security Threats” survey conducted by the IPA (Information-technology Promotion Agency, Japan), it listed a wide range of “cybersecurity threats” that may have a large social and economic impacts (Chart 2). This year, there are also cyberattacks aimed at the new normal working styles such as Work From Home have been listed as new threats.

 

<Chart 2: “2021 Top 10 Threats” to watch out for in cybersecurity>

Source:  Created by Rakuten Securities, Inc. based on survey by IPA (Information-technology Promotion Agency, Japan)

In the future, as DX (digital transformation) evolves internally and externally, it is expected that the demand for strategic protection and countermeasures against these potential threats will increase. Cybersecurity can be said to be one of the fields where high growth is expected due to the demand and development of DX.

 

3. Leverage ETFs to diversify into the cybersecurity industry

As demand for cybersecurity grows, investment opportunities for related companies are attracting attention around the world, especially in the United States. Thus, there are funds focusing on diversified investments in companies (stocks) that are expected to benefit from the growth and technological improvement of the cybersecurity business within the US-registered ETFs (Exchange Traded Funds).  Chart 3 lists and compares two types of US-registered ETFs (HACK and BUG).

 

<Chart 3: Leading cybersecurity ETFs are HACK and BUG>

(Source) Created by Rakuten Securities, Inc. from Bloomberg (July 14. 2021)

 

Both are funds that make diversified investments in the technology-related companies that provide products and services against cyberattacks. Both funds have garnered strong “percentage changes from a year ago”. Amongst others, HACK (PureFunds ISE Cyber Security ETF) emphasizes on risk mitigation by diversifying investment in a relatively large number of stocks (67 stocks), whereas BUG (Global X Cybersecurity ETF) has a relatively limited number of stocks and aims for higher returns through concentrated investment.

Both funds make diversified investments according to independently selected benchmarks (indexes) and are investing in companies that provide consulting services and products related to cybersecurity in areas such as IoT (Internet of Things) and cloud computing. BUG for example holds a large portion of CrowdStrike Holdings (CRWD), Zscaler (ZS), Fortinet (FTNT), Palo Alto Networks (PANW), Okta (OKTA), Check Point Software Technologies (CHKP), etc. Chart 4 shows trends in the trade prices of both ETFs. 

 

<Chart 4: Let’s compare the trade price trends of HACK and BUG>

(Source) Created by Rakuten Securities, Inc. from Bloomberg  (beginning of 2020 – July 14, 2021)

 

Many cybersecurity stocks are IT related hence may experience high volatility in the short term. Nonetheless, they are still attracting attention because of the increase demand for cybersecurity and long-term earnings growth thus rendering such investments still attractive.