Cybersecurity Trends: Top 10 ETFs For Cyber Defense

Published on March 22, 2024 at 9:05 am by Hamna Asim in ETF Trading, News

In this article, we discuss 10 ETFs for cyber defense. If you want to skip our discussion on the cybersecurity industry, head over to Cybersecurity Trends: Top 5 ETFs For Cyber Defense.

In 2024, Gartner predicts several significant cybersecurity trends driven by Generative AI (GenAI), unsecure employee behavior, third-party risks, continuous threat exposure, boardroom communication gaps, and identity-first security approaches. These trends include the rapid evolution of Generative AI, increasing reliance on outcome-driven metrics (ODMs) to demonstrate cybersecurity investment’s tangible protection levels, a shift towards behavioral change to reduce cybersecurity risks, the emphasis on resilience-oriented investments in light of third-party cybersecurity incidents, the adoption of continuous threat exposure management (CTEM) to evaluate and mitigate asset vulnerabilities, and the rising importance of an identity-first approach to security, particularly focusing on Identity and Access Management (IAM) to improve cybersecurity and business outcomes.

In recent years, the cybersecurity economy has experienced rapid growth, outpacing the overall world economy significantly. However, this growth has been uneven, with larger and more developed economies reaping most benefits while others lag behind. The 2024 Global Cybersecurity Outlook (GCO) by the World Economic Forum highlights a concerning trend – organizations maintaining minimum viable cyber resilience are rapidly diminishing, down 31% since 2022. This widening gap between cyber-resilient organizations and those struggling to keep pace poses serious threats to the integrity of the entire cybersecurity ecosystem.

The uneven distribution of cyber resilience can be attributed to several factors. One significant factor is the cost associated with accessing cyber services, tools, and talent. Larger and more financially robust organizations are better equipped to invest in robust cybersecurity measures, leaving smaller and less affluent organizations at a disadvantage. Additionally, disparities in cyber skills and insurance adoption further exacerbate the divide. Smaller organizations, which are often more vulnerable to cyber threats, are three times less likely to carry cyber insurance compared to larger enterprises, creating a significant gap in risk mitigation strategies. Geographical disparities also play a role, with regions like Latin America and Africa reporting fewer cyber-resilient organizations compared to North America and Europe. This “cybersecurity poverty line” not only reflects financial constraints but also encompasses issues like the cyber skills gap and access to innovative technologies. The lack of sufficient cyber resilience among smaller organizations is particularly troubling, given the interconnected nature of the digital ecosystem. Despite some organizations seeing improvements in cyber resilience, the overall trend indicates a widening gap between cyber-resilient leaders and those struggling to adapt. While competition is healthy in traditional economic contexts, cyber leaders recognize that the interconnectedness of the digital landscape makes this growing divide more harmful than beneficial.

Google CEO Sundar Pichai believes that rapid advancements in artificial intelligence could play a crucial role in bolstering defenses against cybersecurity threats. Despite concerns about the potential misuse of AI, Pichai contends that these intelligence tools could aid governments and businesses in accelerating the detection and response to threats posed by hostile actors in cyberspace. Cybersecurity attacks have become more prevalent and sophisticated, with malicious actors increasingly leveraging them to exert power and extort money. According to Cybersecurity Ventures, these attacks cost the global economy an estimated $8 trillion in 2023, a figure projected to rise to $10.5 trillion by 2025. While some, like Britain’s National Cyber Security Centre, warn that AI may exacerbate these threats by lowering the barriers to entry for cyber hackers, Pichai argues that AI can also reduce the time required for defenders to identify and counter attacks, thereby mitigating the defenders’ dilemma. To address these challenges, Google has launched a new initiative offering AI tools and infrastructure investments aimed at enhancing online security. One such tool, Magika, is an open-source tool designed to detect malware, while a white paper proposes measures and research to safeguard AI. These efforts coincide with a pact signed by major companies at the Munich Security Conference to prevent AI tools from being used to disrupt democratic processes, particularly in the upcoming 2024 election year.

Some of the best cybersecurity stocks to buy include Fortinet, Inc. (NASDAQ:FTNT), Booz Allen Hamilton Holding Corporation (NYSE:BAH), and Palo Alto Networks, Inc. (NASDAQ:PANW). However, we discuss the best cybersecurity ETFs in this article.

Our Methodology

We curated our list of the best cybersecurity ETFs by choosing consensus picks from multiple credible websites. We have mentioned the 5-year share price performance of each ETF as of March 21, 2024, ranking the list in ascending order of the share price. We have also discussed the top holdings of the ETFs to offer better insight to potential investors.

Photo by Kaur Kristjan on Unsplash

Cybersecurity Trends: Top ETFs for Cyber Defense

10. Themes Cybersecurity ETF (NASDAQ:SPAM)

5-Year Share Price Performance as of March 21: 10.27%

Themes Cybersecurity ETF (NASDAQ:SPAM) aims to mirror the performance of the Solactive Cybersecurity Index, which is composed of the top 35 digital security software companies by market capitalization. Launched on December 8, 2023, Themes Cybersecurity ETF (NASDAQ:SPAM) seeks to match the price and yield of its benchmark index, with an expense ratio of 0.35%. It is one of the best cybersecurity ETFs to invest in.

Okta, Inc. (NASDAQ:OKTA) is one of the top holdings of Themes Cybersecurity ETF (NASDAQ:SPAM). Okta, Inc. (NASDAQ:OKTA) operates globally as an identity management company, offering a suite of products and services to manage and secure user identities. On February 29, Okta shares experienced a premarket surge of over 20% following an upgrade from BofA. BofA raised Okta’s rating from Underperform to Buy and set a price target of $135, citing strong fourth-quarter performance and the possibility of continued outperformance in the upcoming fiscal year.

According to Insider Monkey’s fourth quarter database, 47 hedge funds were bullish on Okta, Inc. (NASDAQ:OKTA), same as the prior quarter.

In addition to Fortinet, Inc. (NASDAQ:FTNT), Booz Allen Hamilton Holding Corporation (NYSE:BAH), and Palo Alto Networks, Inc. (NASDAQ:PANW), Okta, Inc. (NASDAQ:OKTA) is one of the best cybersecurity stocks to buy.

Meridian Growth Fund made the following comment about Okta, Inc. (NASDAQ:OKTA) in its Q3 2023 investor letter:

“Okta, Inc. (NASDAQ:OKTA) is the largest independent identity software company, serving enterprises, small- and medium-sized businesses, universities, non-profits, and government agencies across the globe. Its solutions provide higher-level security authentication services, a business-critical function that has the attention of CEOs and IT leaders everywhere. The company’s integration with 7,000 other software vendors and system providers is a competitive advantage that enables rapid and seamless implementations. Okta’s complete product suite allows customers to deploy an enterprise-wide identity platform that serves both the workforce segment (clients’ employees) and the customer segments (clients’ customers). The stock has started to recover after falling nearly 85% from post-COVID bubble levels due to a stabilization in the overall macro environment for security services. The company has also seen a normalization in salesforce attrition which had hampered growth. The stock moved higher during the quarter when it reported higher than expected revenues and a much-improved adjusted operating margin of 11% versus -3% in the prior year quarter. Beyond its core capabilities, which are in high demand, we are also encouraged by the company’s ability to expand into product adjacencies such as privileged access management and identity governance. Due to these improving fundamentals, we added to our position in the company during the period.”

9. CI Digital Security Index ETF (TSE:CBUG.TO)

5-Year Share Price Performance as of March 21: 21.45%

CI Digital Security Index ETF (TSE:CBUG.TO) aims to replicate the performance of a global digital security industry index, after deducting expenses. It mirrors the Solactive Digital Security CAD Hedged Index, which tracks companies operating in the global digital security industry using the ARTIS classification system. The index also hedges foreign currency exposure to Canadian dollars. Established on February 24, 2022, CI Digital Security Index ETF (TSE:CBUG.TO) charges a management fee of 0.40%. As of March 20, 2024, its net assets amount to C$2.50 million.

CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is the largest holding of CI Digital Security Index ETF (TSE:CBUG.TO). CrowdStrike Holdings, Inc. (NASDAQ:CRWD) is a cybersecurity solutions provider operating globally. On March 6, CrowdStrike Holdings, Inc. (NASDAQ:CRWD) garnered attention after surpassing expectations in both fourth-quarter results and guidance, earning praise from Wall Street. J.P. Morgan analyst Brian Essex noted the company’s progress towards a $100 billion market cap, citing improved growth, profitability, and free cash flow. He maintained an Overweight rating on CrowdStrike Holdings, Inc. (NASDAQ:CRWD) and raised the price target to $371 from $350.

According to Insider Monkey’s fourth quarter database, 62 hedge funds were long CrowdStrike Holdings, Inc. (NASDAQ:CRWD), compared to 69 funds in the last quarter.

Baron Fifth Avenue Growth Fund stated the following regarding CrowdStrike Holdings, Inc. (NASDAQ:CRWD) in its fourth quarter 2023 investor letter:

“Improving unit economics: Many of our companies were able to significantly expand margins during 2023 even though revenue growth decelerated for some of them, showcasing the power of their capital-light, recurring revenue business models, and their increased focus on efficiency. Another example is the cybersecurity platform, CrowdStrike Holdings, Inc. (NASDAQ:CRWD), which is expected to increase its operating margins from 15.9% in 2022 to 20.8% in 2023 as a result of growing efficiencies, while the company’s platform offering is resonating with an increasing number of customers (for example, deals with eight or more modules grew 78% year-over-year in the last quarter), which is a tailwind to sales productivity.”

8. Xtrackers Cybersecurity Select Equity ETF (NASDAQ:PSWD)

5-Year Share Price Performance as of March 21: 22.65%

Xtrackers Cybersecurity Select Equity ETF (NASDAQ:PSWD) ranks 8th on our list of the best cybersecurity ETFs. Xtrackers Cybersecurity Select Equity ETF (NASDAQ:PSWD) aims to match the performance of the Solactive Cyber Security ESG Screened Index, before fees and expenses. The ETF had net assets totaling $6.20 million as of March 20, 2024, with a net expense ratio of 0.20%. The fund was launched on July 13, 2023. It is one of the best cybersecurity ETFs to invest in.

CyberArk Software Ltd. (NASDAQ:CYBR) is one of the top holdings of Xtrackers Cybersecurity Select Equity ETF (NASDAQ:PSWD). The company develops and sells software-based identity security solutions globally. On February 8, CyberArk Software Ltd. (NASDAQ:CYBR) reported a Q4 non-GAAP EPS of $0.81 and a revenue of $223.1 million, outperforming Wall Street estimates by $0.34 and $13.36 million, respectively.

According to Insider Monkey’s fourth quarter database, 50 hedge funds were bullish on CyberArk Software Ltd. (NASDAQ:CYBR), up from 32 funds in the last quarter. Robert G. Moses’ RGM Capital is the largest stakeholder of the company, with 1 million shares worth $221.2 million.

Baron Discovery Fund made the following comment about CyberArk Software Ltd. (NASDAQ:CYBR) in its Q4 2022 investor letter:

“We initiated a position in CyberArk Software Ltd. (NASDAQ:CYBR), an identity security platform focused primarily on privileged access management (PAM). CyberArk’s PAM technology prevents bad actors from stealing and exploiting the credentials of superuser accounts like IT administrators, cybersecurity managers, and network administrators. These privileged accounts can access a company’s most critical IT systems–domain directory servers (all passwords, profiles, and data on employees), firewalls, code repositories, and database servers–making the credentials a high-value target in ransomware attacks (consulting firm Forrester estimates that 80% of security breaches involve privileged credentials). CyberArk technology detects, stores, and manages all the privileged credentials in an organization, monitors the critical IT systems, and helps contain the damage hackers can cause if they breach a corporate network. The increasing frequency and severity of ransomware attacks, heightening geopolitical tension, and stricter requirements of cyber insurance policies have all made PAM a higher priority spending category among security teams.

CyberArk is the market leader in the PAM category, with over 20% market share. The company has successfully leveraged its foothold to expand into complementary markets like identity and access management (authentication of a company’s employees and vendors), secrets management (detection of credentials used for machine-to-machine communications), and endpoint management. These newer solutions now account for over 45% of annual subscription recurring revenue and are growing over 100% annually. CyberArk is also making good progress in its business model transition from on-premise (one-time perpetual license payment plus some recurring maintenance payments) to a recurring subscription revenue model. The new model expands CyberArk’s addressable market, enables it to cross-sell products more efficiently, increases the lifetime value of its customers, and improves revenue predictability. Recurring revenue now accounts for more than 84% of total sales and annualized recurring revenue has been growing over 40% for the past four quarters. As subscription contracts come up for renewal in the next two to three years, we expect cash-flow margins to increase from mid-single digits today to CyberArk’s healthy historical margin levels of 20%-plus. Long term, the combination of resilient end-market growth, better recurring revenue mix, and margin expansion should bode well for the stock.”

7. iShares Digital Security UCITS ETF USD Dist (LON:SHLG.L)

5-Year Share Price Performance as of March 21: 23.92%

Ranking 7th on our list of the best cybersecurity ETFs is iShares Digital Security UCITS ETF USD Dist (LON:SHLG.L). iShares Digital Security UCITS ETF USD Dist (LON:SHLG.L) aims to mirror the performance of an index consisting of developed and emerging market companies with substantial revenues from digital security sectors. The ETF had net assets totaling $1.5 billion as of March 20, 2024, with an expense ratio of 0.40%. Its portfolio consists of 101 stocks. The fund was established on October 29, 2018.

Nutanix, Inc. (NASDAQ:NTNX) is one of the largest holdings of iShares Digital Security UCITS ETF USD Dist (LON:SHLG.L). The company offers an enterprise cloud platform globally, converging virtualization, storage, and networking services into a single solution. On February 28, Nutanix announced financial results for its second quarter ended January 31, 2024. The company reported a non-GAAP EPS of $0.46 and a revenue of $565.2 million, exceeding Wall Street estimates by $0.17 and $14.81 million, respectively.

According to Insider Monkey’s fourth quarter database, 48 hedge funds were long Nutanix, Inc. (NASDAQ:NTNX), compared to 43 funds in the prior quarter. David Blood and Al Gore’s Generation Investment Management is the largest stakeholder of the company, with 17.25 million shares worth $823 million.

Carillon Chartwell Small Cap Value Fund made the following comment about Nutanix, Inc. (NASDAQ:NTNX) in its Q3 2023 investor letter:

“Within the Carillon Chartwell Small Cap Growth Fund, information technology and industrials were the strongest-performing sectors, with strong stock selection leading to alpha generation. The new management team at Nutanix, Inc. (NASDAQ:NTNX) continues to execute well, delivering another positive quarterly earnings surprise. Nutanix’s core hyper converged infrastructure (HCI) technology continues to gain market share over its competitors.”

6. Global X Defense Tech ETF (NYSE:SHLD)

5-Year Share Price Performance as of March 21: 31.14%

Global X Defense Tech ETF (NYSE:SHLD) ranks 6th on our list of the best cybersecurity ETFs to buy. Global X Defense Tech ETF (NYSE:SHLD) aims to invest in companies poised to benefit from the growing adoption of defense technology. This includes firms involved in cybersecurity systems, artificial intelligence, big data, and advanced military hardware such as robotics and aircraft. Global X Defense Tech ETF (NYSE:SHLD) seeks to match the performance of the Global X Defense Tech Index before fees and expenses. As of March 20, 2024, the fund’s net assets equal $31.98 million, along with an expense ratio of 0.50% and a portfolio comprising 34 stocks.

RTX Corporation (NYSE:RTX) is one of the top holdings of Global X Defense Tech ETF (NYSE:SHLD). It is an aerospace and defense company serving commercial, military, and government customers globally. RTX Corporation (NYSE:RTX) distributed a $0.59 per share quarterly dividend on March 21.

According to Insider Monkey’s fourth quarter database, 61 hedge funds were long RTX Corporation (NYSE:RTX), compared to 63 funds in the prior quarter. Ken Fisher’s Fisher Asset Management is the largest stakeholder of the company, with approximately 9 million shares worth $755.4 million.

Like Fortinet, Inc. (NASDAQ:FTNT), Booz Allen Hamilton Holding Corporation (NYSE:BAH), and Palo Alto Networks, Inc. (NASDAQ:PANW), hedge funds are piling into RTX Corporation (NYSE:RTX).

Matrix Asset Advisors made the following comment about RTX Corporation (NYSE:RTX) in its Q3 2023 investor letter:

“In Q3, we started a new position in RTX Corporation (NYSE:RTX), formerly Raytheon Technologies, an aerospace and defense company that provides advanced systems and services for commercial, military and government customers worldwide. The company was formed in 2020 through the combination of Raytheon Company and the United Technologies Corporation aerospace businesses. We had previously owned United Technologies and were impressed with their CEO, Greg Hayes, now the CEO of RTX. The opportunity to purchase RTX came after the company disclosed a problem with an engine component that will result in a significant charge to inspect and replace. This is a fixable issue requiring time and money, but we believe the price decline provided a good opportunity to start a position in this highly profitable, well-managed company.”

Click to continue reading and see Cybersecurity Trends: Top 10 ETFs For Cyber Defense.

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Published on May 1, 2024 at by Inan Dogan, PhD

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