What the hack?

Colonial Pipeline puts the spotlight on anti-hacker stock ETFs


Jeff Spiegel Jun 1, 2021

Key takeaways

  • The Colonial Pipeline story underscored why cybersecurity could be a long-term investment opportunity.
  • The frequency and severity of cyberattacks are accelerating and businesses leaders are not confident in their current levels of protection.  
  • Megatrend ETFs can help investors access cybersecurity stocks in a diversified way.

Headline-grabbing cyberattacks are becoming more frequent and companies are ramping up spending on security in the face of increasingly sophisticated threats.

For investors, the push for stronger defense against hackers could represent a potential long-term growth opportunity. Exchange traded funds (ETFs) can help target stocks connected to the fast-growing cybersecurity trend.

Flows into U.S.-listed cybersecurity ETFs

Flows into U.S.-listed cybersecurity ETFs

Source: Morningstar, Blackrock, as of April 30, 2021. Chart includes data from March 2020 through April 2021. Universe of cybersecurity-dedicated ETFs is based on all US-Listed ETFs that have "Cybersecurity" in their fund name based off Bloomberg data as of 4/30/2021. Flows are subject to change.


Security spending on the rise to counter sophisticated attacks

In recent months alone, a ransom-style attack shut down a major U.S. fuel pipeline and news broke that a company’s own software updates were hijacked to spy on high-profile clients.1 As work and schools moved increasingly online in 2020, malware attacks (malicious software) more than tripled from the prior year earlier and ransomware attacks (the virtual extortion of companies) more than quadrupled.2

Corporate spending on cybersecurity to counter the threat is rising quickly. Worldwide spending on information security and risk management technology and services is forecast to top $150 billion in 2021, up 12% from last year, and up about 50% from four years ago.3

Investors are taking note

Investor interest in cybersecurity funds is also accelerating. Pandemic-period flows into cybersecurity-dedicated ETFs listed in the U.S. were $2.51 billion (from March 2020 through April 2021) accounting for about 40% of the funds’ collective $6.53 billion in assets under management.4

Driving future spending

The potential for future growth in the industry appears clear. Fully 61% of chief information officers surveyed by Gartner in late 2020 said they plan to increase spending on cyber and information security.5

New rules may help accelerate the trend for more cybersecurity spending. In May 2021, President Biden signed an executive order to improve the nation’s cybersecurity and protect the federal government’s network.6 The order calls for heightened cyber standards for companies doing business with the federal government, a process which may also accelerate demand for more robust cybersecurity.

Conclusion

Investors looking to target the full spectrum of cybersecurity companies might consider index-tracking ETFs that include shares linked both to hardware and software protection against cyber threats.

We call this megatrend investing because, even when a big-picture investment trend such as cybersecurity is clear, it can be hard to pinpoint which individual companies will thrive over the long haul. Index-tracking megatrend ETFs can provide targeted access to the theme of cybersecurity while remaining diversified enough to help reduce individual stock risk.

Jeff Spiegel

Jeff Spiegel

Head of U.S. iShares Megatrend and International ETFs

Kyle R. Chapman

Contributor

Anna Verhaegen

Contributor