How to Capitalize on the Cybersecurity Secular Investment Opportunity

Cybersecurity remains one of the most compelling investment themes in today’s technology-driven world. With the exponential growth of digitalization and artificial intelligence, the need for robust cybersecurity solutions has never been greater.

The constant threat of cybercrime, ranging from individual actors to state-sponsored attacks, underscores the urgency for organizations and governments to prioritize the protection of sensitive data, proprietary assets, and critical infrastructure.

Investors seeking to capitalize on the cybersecurity sector can find promising opportunities through exchange-traded funds (ETFs), which offer diversified exposure without the risk of single-stock selection. Among the notable ETFs in this space, the four largest provide a detailed look at the varying strategies and risk-reward profiles available to investors.

Cybersecurity ETFs: Overview and Key Metrics

The First Trust NASDAQ Cybersecurity ETF ( First Trust NASDAQ Cybersecurity ETF(CIBR) ) leads the pack with $7.41 billion in assets under management (AUM). CIBR holds a concentrated portfolio of 33 companies, with the top 10 stocks comprising 61.8% of its total weight. Broadcom (AVGO) is its largest holding, making up 11.05% of the fund. CIBR stands out for its relatively low price-to-earnings (P/E) ratio of 44.1 and its solid liquidity as the most actively traded cybersecurity ETF.

The Amplify Cybersecurity ETF ( ETFMG Prime Cyber Security ETF(HACK) ) follows with $1.92 billion in AUM. It holds 27 companies, and its top 10 holdings account for 58.5% of the total weight. Like CIBR, HACK’s largest holding is Broadcom ( Broadcom(AVGO) ), but it has an even higher weighting of 13.68%. This ETF has a higher P/E ratio of 71.3, reflecting a concentration in higher-growth, higher-valuation stocks.

The iShares Cybersecurity and Tech ETF ( iShares Cybersecurity and Tech ETF(IHAK) ) is next, with $929.5 million in AUM. IHAK offers a more balanced approach, with 37 holdings and the top 10 stocks accounting for only 41.4% of the fund. CyberArk Software (CYBR) is its largest holding at 4.47%. It boasts the lowest expense ratio of the group at 0.47% and a P/E ratio of 52.0, making it an appealing choice for risk-conscious investors.

The smallest ETF, the Global X Cybersecurity ETF ( Global X Cybersecurity ETF(BUG) ), has $800.4 million in AUM. BUG is more concentrated, with only 22 holdings and a top 10 weight of 56.8%. Its largest holding, Fortinet ( Fortinet(FTNT) ), accounts for 6.85%. However, BUG’s P/E ratio of 76.0 reflects its focus on high-growth stocks, which may be less attractive in a rising interest rate environment.

The Cast of Players

When evaluating cybersecurity ETFs, investors must weigh factors such as diversification, expense ratios, valuation metrics, and sector dynamics. Each ETF offers a unique combination of these attributes, catering to different investment strategies and risk appetites.

The First Trust NASDAQ Cybersecurity ETF (CIBR) appeals to those seeking liquidity and exposure to established players in the sector. Its relatively low P/E ratio and active trading volume make it an efficient choice for investors prioritizing accessibility and valuation discipline. However, its concentrated portfolio introduces some degree of risk.

The CIBR technical picture is robust as the long-term structural trend extends out of a cup-and-handle base that formed throughout 2024 before breaking out during the fall, as shown below.

The Amplify Cybersecurity ETF (HACK) caters to growth-oriented investors with its heavier weighting in high-growth stocks like Broadcom. While its concentration in fewer holdings may amplify returns in a bullish market, it also increases risk in volatile conditions. HACK’s higher expense ratio further detracts from its appeal compared to peers.

HACK is also fresh out of a cup-and-handle breakout – but this time, it’s a weekly chart, with the base spanning nearly three years. That presents more follow-through potential, in theory.

The iShares Cybersecurity and Tech ETF (IHAK) emerges as a standout choice for its balanced approach. With the broadest diversification among the group, the lowest expense ratio, and a lower concentration in top holdings, IHAK provides a well-rounded entry into the cybersecurity space. Its exposure to smaller companies with potential takeover appeal adds an additional layer of growth potential.

As shown here, IHAK has been steadily trending along the support corridor framed by the stock’s major bull trendline and its 200-day simple moving average (the curved green line).

The Global X Cybersecurity ETF (BUG) presents a higher-risk, higher-reward profile due to its focus on fewer holdings and high-growth stocks. While it offers concentrated exposure to innovative companies, its high P/E ratio and limited diversification make it less suitable for conservative investors.

BUG is the only major ETF in the space that hasn’t been able to break above its 2021/2022 range highs over the past 6 months.

IHAK Wins as the Best Long-Term Play on Cybersecurity Investments

The cybersecurity industry is poised for sustained growth as digital transformation accelerates across industries. Businesses and governments will continue to allocate significant resources to combat evolving cyber threats, creating a robust demand for innovative solutions.

Furthermore, the sector’s critical importance ensures its resilience against economic downturns, making it an attractive option for long-term investors.

Among the ETF options, the iShares Cybersecurity and Tech ETF (IHAK) strikes the best balance between risk and reward. Its diversified holdings, low expense ratio, and moderate valuations position it as a compelling choice for investors seeking stable exposure to the dynamic cybersecurity market.

For those with a higher risk tolerance, the First Trust NASDAQ Cybersecurity ETF (CIBR) and Amplify Cybersecurity ETF (HACK) offer targeted exposure to leading companies in the space. However, careful monitoring of market conditions and valuation trends is crucial for these concentrated funds.