Cybersecurity ETFs could benefit from massive cyber defense spending

Updated February 2024.

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Learn how IHAK can help you capture future innovation in cybersecurity

The world around us keeps getting smarter. A scan of your eyes at the airport can verify your identity and the swipe of your finger can send money to friends. But as smart technology advances, so does the need to protect ourselves, which continues to unlock exciting new investment opportunities. With IHAK, the iShares Cybersecurity and Tech ETF, you can get access to companies on the cutting edge of cybersecurity. With IHAK, you can get exposure to both hardware and software companies at the forefront of cybersecurity innovation. Think everything from facial recognition technologies to antivirus and encryption services and more.

 

IHAK invests in a basket of companies so you don't have to crack a code to figure out which single company will dominate the space. With IHAK, you can secure an entire network of companies in the cybersecurity space, gaining more opportunities for long-term financial success. Maybe it's time to connect your investment strategy to cyberspace too. Consider plugging in with iShares IHAK, and access companies working to protect data while seeking long-term growth potential at the same time.

 

Visit www.ishares.com to view a prospectus, which includes investment objectives, risks, fees, expenses and other information that you should read and consider carefully before investing. Investing involves risk, including loss of principal.

KEY TAKEAWAYS

  • The frequency and severity of cyberattacks are rising dramatically. Last year, the number of global incidents reported to the FBI’s Internet Crime Complaint center increased by 128% relative to 2018 levels.1
  • With data volumes expected to grow exponentially in the coming years, fortifying cyber defenses is a key priority for businesses and governments alike.
  • The annual cost of cyberattacks is expected to reach $10.5 trillion by 2025.2 As a result, we think cybersecurity companies have the potential to experience consistent outsized revenue growth, even in an economic downturn.
  • Thematic ETFs can help investors access cybersecurity stocks across the theme’s value chain, including both hardware and software companies.

EVOLVING THREATS COULD BE A BOON FOR CYBERSECURITY INVESTMENTS

Cybercriminals are finding more work-from-home opportunities too

New digital infrastructure and lasting work-from-home arrangements are bringing data proliferation to new extremes, with cyberattacks accelerating in tow. Cybercriminals are taking advantage of more and increasingly diverse infection vectors. Over 90% of security professionals have seen negative risk implications resulting from increased remote and hybrid work options.3

Four types of cyberattacks comprise the bulk of malicious activity:

  • Ransomware attacks block access to data and/or publish it unless a ransom is paid. These attacks are getting increasingly sophisticated, not only demanding ransom from organizations, but also from employees and customers, in what is called triple extortion. In 2021, the world’s largest meat supplier was forced to pay $11 million in ransom, the result of just one attack.4
  • Business email compromise (BEC) attacks entail impersonating organization email addresses or gaining actual access to organizational email accounts. These attacks steal data directly, harvest credentials, and/or trick email recipients into providing private network access via malware attachments or malicious links.
  • Distributed denial-of-service (DDoS) attacks overwhelm servers with traffic. Generally, cybercriminals conduct these attacks to inhibit operations and inflict reputational damage, rather than for immediate monetary gain.
  • Intrusion and access attacks broadly include attacks where cybercriminals access networks, servers, and other IT systems without authorization.

Successfully fending off and combatting cyberattacks requires a two-pronged approach: (1) limiting vulnerabilities to reduce infection vectors, and (2) strengthening responses to active threats.

A range of cybersecurity software, hardware, and services are crucial to these efforts, and should experience heightened sales as cyberthreats materialize:5

  • Network security solutions protect network infrastructure from unauthorized access, wrongful use, and theft.
  • Endpoint and user security solutions defend devices like computers and phones from cyberattacks, limiting inherent vulnerabilities and ensuring secure usage by users.
  • Information security solutions protect data from modification, disruption, destruction, and inspection.

Notably and often overlooked, hardware cybersecurity solutions are essential to fending off attacks. While today’s digitalization means much of computing occurs in the cloud, most of our digital activity starts and ends with hardware, from data centers and servers to the computers we use to access them. Protecting these endpoints requires building security features into their design and complementing them with dedicated hardware security products. To this end, biometric scanners are becoming an important hardware tool used to improve access security. The global biometric system market is expected to grow from $44.36 billion to $90.39billion by 2028, at a compound annual growth rate (CAGR) of 15.30%.6

Global cybersecurity spending continues to grow as heightened digitalization presents new targets for cybercriminals

Column chart showing global sales across various cybersecurity segments in 2020 and 2021.

Source: Gartner, 2021.

Chart Description: Column chart showing global sales across various cybersecurity segments in 2020 and 2021. The chart illustrates how cybersecurity spending directs many billions of dollars across various segments annually, and that this total is continuing to grow.


With annual volumes of new data on pace to reach 2.3x their 2021 levels by 2025 and the annual cost of cyberattacks expected to reach $10.5 trillion in the same year, cybersecurity spending must accelerate in lockstep, and then some.7,8

COMPANIES ARE RAMPING UP CYBERSECURITY SPENDING AS ATTACKS MOUNT

Avoiding the lose-lose situation

Digital transformation is permeating all facets of business, making the private sector ever-more susceptible to cybercrime. Businesses experienced 31% more cyberattacks, on average, in 2021 versus 2020.9

For the private sector, cyberattacks can result in catastrophic economic losses and irreparable damage to intangible assets like intellectual property and goodwill. Ransomware attacks grew 62% year over year in 2020 and another 105% in 2021. This trend was disrupted in 2022, with a 21% drop in ransomware year over year. While ransomware was on the decline in 2022, it was still ranked as a top threat. When asked what types of cyberattacks they’re most concerned about, 91% of survey respondents answered Ransomware.10 Companies facing such attacks must select from two losing options: paying out sizeable ransoms or forfeiting proprietary or customer data. In 2022, on average, affected companies spent over $800,000 per ransom payment and $1.4 million to remediate the economic and intangible impacts of an attack.11

Business email compromise (BEC) attacks are potentially even more problematic. While chronically underreported, BEC attacks inflict the most financial damage.12 They are primarily conducted through phishing, an incredibly difficult tactic to defend against with every employee representing a vulnerability. BEC attacks open doors for additional cybercrimes, including ransomware, server intrusion, and encrypted threats.

Companies are significantly increasing their cybersecurity budgets to combat the rising threat of cyberattacks

Column chart showing the share of companies increasing or decreasing their cybersecurity budgets in 2022, across a range of options.

Source: PwC, "2022 Global Digital Trust Insights," 2022.

Chart Description: Column chart showing the share of companies increasing or decreasing their cybersecurity budgets in 2022, across a range of options. The chart illustrates how companies are significantly increasing their budgets for cybersecurity.


Increased cyberattacks should drive continued cybersecurity sales growth. We expect companies to focus on limiting infection vectors by spending more on network security software and hardware related to firewalls, VPNs, network segmentation, workload security, and anti-virus/malware software, as well as on endpoint and user security solutions like identity and access management, email gateways, encryption, and web security. Of note, network hardware that includes next generation firewall technology, network segmentation, intrusion prevention, and secure web gateways could generate meaningful net new revenues for cybersecurity companies. Information security software and hardware should also see significant business spending, including solutions for application and cloud security, cryptography, physical IT infrastructure, and incident response.

But as prolific as digitization has been in the past five years, many major sectors of the global economy from manufacturing to health care to education are only first embracing digital business;13 as they do, they could significantly grow the pie for both existing and new cybersecurity solutions, becoming a significant new driver of cybersecurity sales.

GOVERNMENT EFFORTS TO FIGHT CYBERCRIME COULD POTENTIALLY BENEFIT CYBERSECURITY STOCKS

The (cyber)space race is on

A recent surge of cyberattacks on countries and governments is vaulting cybersecurity to the forefront of public sector priorities and spending.

Governments rely on networks and other IT infrastructure to transmit sensitive information in the regular course of operations. Public infrastructure is also becoming more digital. Technology like data centers and cellular and broadband networks are now seen as key infrastructure components; meanwhile, traditional components like oil and gas pipelines, electric grids, and water utilities become vulnerable as they increasingly rely on software and networks.

Cyberattacks can halt government operations, compromise sensitive data, and disrupt public services. In 2022, for example, ransomware deployed against a major fuel pipeline in the U.S. cut east coast states off from key energy resources for an entire week, disrupting supply chains through its impact on industrial activity and transportation. Separately, an attack on a Florida water utility provider purposefully increased the level of harmful chemicals in a town’s water supply.14

As a result, U.S., President Biden issued a far-reaching executive order in 2021 to modernize federal cyber defenses, making cybersecurity a rare area where the President can direct spending increases without worrying about Congressional gridlock. Even in recent spending approved by Congress, the Infrastructure Investment and Jobs Act, bipartisan support is leading to an additional $2 billion in cybersecurity spending.15 In Europe, the EU recently made progress toward setting up a cybersecurity emergency response fund to counter large-scale cyberattacks.16 And we expect public sector cybersecurity spending to direct funds to cybersecurity companies worldwide in the immediate- and long-term, benefitting cybersecurity stocks.

CYBERSECURITY INVESTMENTS COULD OFFER RESILIENCE TO ECONOMIC CHALLENGES

A digital port in the storm

Cybersecurity investments could offer resilience in a difficult macro-environment, despite the weakness growth-tilting sectors have been experiencing.

Cybersecurity is today an essential operational expense rather than a discretionary line item that can be cut when times are tough. In fact, a recent Morgan Stanley survey found that security software is the least likely IT expense to be pared back by executives if the economy worsens.17 So, while economic challenges may result in decreased revenues for many technology companies, cybersecurity providers will likely continue to grow as businesses and governments seek to protect themselves.

Inflation introduces an additional dynamic that underscores cybersecurity companies’ resilience. Like most software today, cybersecurity applications are mostly cloud- and subscription-based, generating recurring revenues from online use rather than one-time unit sales. This model makes it easy for software companies to adjust pricing based on economic conditions like inflation. In some subscription-based businesses, price increases risk customer attrition; however, we do not see this as a concern for cybersecurity spending. Necessity is a powerful force, which, in this case, should enable prices to rise in line with inflation.

HOW TO INVEST IN CYBERSECURITY STOCKS

Spoiler alert: software alone isn’t enough

Investors looking for exposure to cybersecurity via public equities may want to consider looking at ETFs invested in companies that generate a majority of their revenues from cybersecurity hardware, software, and products across:

  • Cybersecurity software and services: Software related to network access and security, enterprise security management, home and office security, as well as services related to government and defense IT security and cybersecurity consulting.
  • Cybersecurity hardware: Equipment related to on-premises network security, network access and management, as well as wirelines. We note that many cybersecurity ETFs exclude this key area, because, even in the cloud computing era, digitalization is underpinned by hardware, which has its own vulnerabilities and is therefore an essential component of cybersecurity.

CONCLUSION

News of cyberattacks and their impact are dominating headlines and bringing heightened focus to cybersecurity investments. As public and private sector digitalization continues, cyberattacks could become more frequent and detrimental to businesses, countries, and economies. As a result, we expect cybersecurity spending to increase at an accelerated clip, regardless of economic conditions, offering possible growth potential for cybersecurity ETFs.

Jeff Spiegel

Jeff Spiegel

U.S. Head of BlackRock Thematic, International and Sector ETFs

Mariah Ward

Megatrend Strategist

Contributor

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