Cybersecurity has never been more important than today. Non-stop hacks mean that protection is an absolute necessity for both companies and governments. So, what if I want to buy stocks in this high-growth space?
Well, this is where it gets a bit tricky because the choices range from cybersecurity pure-plays to more diversified companies. And more keep going public.
That’s why I think L&G Cyber Security UCITS ETF (LSE: ISPY) might be a smarter way to invest in this area.
Taking a basket approach
This exchange-traded fund (ETF) is invested in 41 different cybersecurity stocks. It aims to track the performance of the ISE Cyber Security UCITS Index and has returned 220% since launch in 2015.
Its top 10 holdings (as of 21 March) are top-notch.
Portfolio weight
Juniper Networks
5.75%
CrowdStrike Holdings
5.73%
Fortinet
5.53%
Cyberark Software
5.46%
Cloudflare
5.34%
Broadcom
5.32%
Check Point Software Technologies
4.75%
Darktrace
4.71%
SentinelOne
4.54%
Ziff Davis
4.51%
After surging 142% in 12 months, CrowdStrike stock is trading on an eye-watering forward price-to-earnings (P/E) ratio of 83. It could be risky buying the stock individually at that valuation.
However, as we can see, it only accounts for around 5.7% of the ETF. It means I can potentially still benefit from CrowdStrike’s ongoing growth while limiting any downside due to the fund’s inherent diversity.
I think the portfolio is solid and can stomach the ETF’s 0.69% ongoing charge. That said, I’d ideally like it to head lower.
US concentration
Two other stocks I like here are Darktrace, the Cambridge-based FTSE 250 firm, and edge computing company Cloudflare. Both are growing fast and have large market opportunities.
One issue I would highlight though is that around 74% of stocks are listed in the US. Therefore, any volatility stateside is likely to have an outsized impact on the ETF’s performance.
For example, the nation’s debt now stands at around $34trn. It was increasing by about $1trn every 100 days recently.
While this isn’t anything to panic about, it could become more of an issue and cause choppiness in the US stock market.
Ready for a top-up
According to Acumen Research and Consulting, the global market for AI-based security products is estimated to go from $14.9bn in 2021 to $133.8bn by 2030.
That’s a 27%+ compound annual growth rate!
Furthermore, the recent release of large language models (LLMs) into the wild is creating even greater need for protection. That’s because hackers are now using generative AI to create malicious software and draft convincing phishing emails.
Actually, I thought of this recently as I opened an email saying I’d won the lottery. Of course, I suspected it wasn’t the jackpot — it ended up being a measly £3.40 on the EuroMillions — but I nevertheless found myself pressing all links available to find out.
Were it a phish, it would have got me hook, line, and sinker.
Anyway, buying shares of this ETF gives me a way of “investing in the guardians of the digital economy“, as the fund literature puts it.
I’ve owned this one in my portfolio for a while and it’s performed very well. But given the growth of AI-emboldened hackers, I might be ready for a top-up.
The post This ETF could be a smart way to buy the best cybersecurity stocks appeared first on The Motley Fool UK.
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Ben McPoland has positions in CrowdStrike and Legal & General Ucits ETF Plc – L&g Cyber Security Ucits ETF. The Motley Fool UK has recommended Cloudflare, CrowdStrike, and Fortinet. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
