Cyber-economy researcher Cyber Ventures recently predicted that global spending on cybersecurity will exceed US$1 trillion over 2017-2021. Firms will spend more than US$120 billion this year alone on cybersecurity, up 35 times in little over a decade.
Cybercrime is a boom industry. One need only follow media reports of the latest cybersecurity attack crippling organisations across countries. Cybercrime has turned from mischief-making to a lucrative global industry and potential war machine.
Who knows how much will be spent protecting data. My hunch is analysts will struggle to keep up with the rise of cybercrime and ransomware epidemics that infiltrate and control computers, demanding payment for information to be returned.
The Internet of Things will create oceans of data that need to be protected, through an expected 50 billion internet-connected devices by 2020. Then there are the risks of cybercriminals refocusing malware from personal computers and laptops to mobile devices, such as tablets and smartphones.
More data means more protection and greater risks for organisations that hold information. Imagine a council that loses data on thousands of residents, who later suffer identify theft, and the costly class actions that could follow.
Or broader economic losses from cybercrime. Microsoft Corp in 2015 estimated cybercrime was costing the global economy around $US3 trillion annually, or 4 per cent of global gross domestic product.
As megatrends go, cybersecurity is a ripper. But investing directly in the cybersecurity trend, through listed Australian companies, is hard. Software-services stocks provide some exposure, but most are small, their operations extend well beyond cybersecurity and some have chequered performance.
Like other technology megatrends, it pays to invest offshore, either directly in cybersecurity companies on other exchanges, local or international managed funds that invest in the sector, or through ASX-quoted exchange-traded funds (ETFs).
The BetaShares Global Cybersecurity ETF (HACK) is an interesting newcomer. It is part of an emerging trend of ASX ETFs that provide exposure to global sectors and trends – a key consideration for long-term investors, such as self-managed superannuation funds (SMSF).
HACK aims to track the yield and performance of the Nasdaq Consumer Technology Association Cybersecurity index, before fees and expenses.
The index has a high weighting in cybersecurity-related companies, such as Check Point Software Technology, Symantec Corp, Cisco Systems Inc., and Palo Alto Networks Inc.
Almost half of index members are in the systems-software industry and about three-quarters are based in the United States. Israel is the second-most represented country in the index, accounting for 11 per cent of asset allocation.
The index’s combined market capitalisation at the end of May 2017 was $504 billion, or about a third of the combined value of all ASX-listed entities. Through HACK, investors have access to multi-billion tech companies that dwarf their Australian counterparts.
HACK has an annual management fee of 57 basis points and estimated expenses of 10 basis points annually – less than actively managed funds that specialise in information technology and competitive with other ETFs that provide tactical asset allocation.
The ETF is unhedged for currency movements, so investors who buy it need to form a view on the underlying index as well as the Australian dollar’s direction against the Greenback.
Also, as a small ETF, investors should assess the size of the bid/ask spread and ensure there is sufficient liquidity to meet their needs. Index members are large, liquid companies, but the liquidity risk is always worth watching for all small ETFs that do not regularly trade.
HACK has returned 15.8 per cent since inception in August 2016, after fees. The ETF is up 8.46 per cent in six months to the end of May 2017.
Chart 1: HACKSource: The Bull
My main interest in HACK is around the benefits of SMSF trustees exposing portfolios to megatrends that take years or decades to play out. The low-cost, diversified nature of ETFs suits this style of investing for trustees who are happy with an index return.
The cybersecurity trend has years to run. Expect some nasty corrections along the way, as so often happens when hype about a trend gets too far ahead of reality. Hype about cybersecurity is rising, but there’s plenty of justification for interest in this field.
In some ways, investing in cybersecurity service providers could be a lower-risk way to play the data trend. As data becomes the next great global “gold rush”, investing in the companies that provide the products and services to protect it has long-term appeal.
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• Tony Featherstone is a former managing editor of BRW and Shares magazines. The information in this article should not be considered personal advice. The article has been prepared without considering your objectives, financial situation or needs. Before acting on the information in this article you should consider its appropriateness, regarding your objectives, financial situation and needs. Do further research of your own or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at July 13, 2017.