The Best Growth ETF to Buy Now. There Is No Stopping This Growth Trend
Investors looking for high growth, secular themes that are resilient in economic downturns should consider adding cybersecurity companies to their portfolio.
The Global X Cybersecurity ETF (BUG) is a cost effective and convenient way to build portfolio exposure in this explosive industry, especially now that valuations of the ETF’s top holdings are finally starting to look attractive considering long-term growth prospects.
Not much has changed in terms of our current conditions of economic uncertainty, higher interest rates, and geopolitical tensions over the past year or two. However, the investment thesis and tailwinds for the cybersecurity industry are still fully intact and will continue to be indefinitely.
In our increasingly digitized age, virtually every government agency, company, and consumer on Earth needs to protect their devices, digital assets, and networks from malevolent cybercriminals and hackers. Additionally, the acceleration of remote work and cloud computing from the pandemic have dramatically increased the need for protection online.
This is why the earnings growth rates and revenue of the top cybersecurity businesses have been growing much faster than the overall market and are projected to grow much more than the overall market's predicted 13.4% compound annual growth rate (CAGR) during the next 7 years.
The cybersecurity market is estimated to grow from $180 billion to more than $370 billion by 2028. This seems reasonable considering cybersecurity spending has just been more prominent on the IT budgets of large companies over the past several years.
Businesses of all sizes are starting to realize the costs and risks of cyberattacks the hard way due to the massive volume of personal data held by these entities.
Tech giants such as Apple, Twitter, and Meta have revealed cyberattacks and data breaches over the past 12 months along with businesses such as Chick-fil-A, Dropbox, Toyota, Uber, Samsung, and American Airlines. The average cost of a data breach in the United States is around $9.4 million. The infamous T-Mobile data breach in 2021 set the company back $350 million and affected 80 million United States citizens.
The ever-growing sophistication of information technology and adoption of digital assets in businesses or government agencies means that there will always be an increasingly greater number of connections or technologies that are vulnerable to cyberattacks.
The sheer scope of defending against all types of cyberattacks means that different industries will require different cybersecurity solutions, and the solutions will be multi-layered in nature. This will create the perpetual need for the cybersecurity market to always evolve and expand as cybersecurity services become more and more indispensable.
The problem for investors is that as cybersecurity evolves and increases in complexity, it will become nearly impossible for the average retail investor to understand the competitive advantages and solutions of the leading cybersecurity businesses on a deep, technical level. Also, considering how diverse the software industry has become and the multifaceted nature of cybersecurity, there will most likely be many winners in the space and there will not be a single cybersecurity company that completely dominates the industry.
Therefore, the most optimal way to invest in this bullish cybersecurity theme is a concentrated basket of leading companies through an exchange traded fund (ETF).
The best cybersecurity ETF to buy at the moment seems to be the Global X Cybersecurity ETF (BUG).
BUG seeks to “invest in companies that stand to potentially benefit from the increased adoption of cybersecurity technology” and the increased risk of online threats.
At the moment, BUG has consolidated its holdings to 23 high conviction stocks such as Fortinet Inc, Palo Alto Networks, Inc, Okta Inc, and Check Point Software Tech. The 23 stocks in the portfolio is much less than rival ETFs, which may seem more risky to investors at a glance. However, this concentration is exactly what investors should want as the focus on the biggest and best companies can benefit from economies of scale. The bigger the company is or becomes, the number of customers increases, which increases the feedback on emerging threats for improvement, which increases the number of customers in a virtuous cycle.
In fact, as you can see in the chart below, BUG has outperformed competitor funds such as the iShares Cybersecurity and Tech ETF (IHAK) and First Trust NASDAQ Cybersecurity ETF (CIBR) over the past years with less downside.
BUG has an expense ratio of 0.5%, which is slightly higher than some investors may like, but it is very reasonable compared with its peers. IHAK has a 0.47% expense ratio while CIBR has a 0.60% expense ratio.
The higher interest rate environment has done great damage to cybersecurity companies’ stock prices over the past year. BUG’s portfolio still trades at expensive valuations even after these massive stock price declines. However, the price-to-sales ratios are a big improvement from last year with the P/S ratios of the ETF’s top holdings being around 10 or under on average.
The question is just how much further can this ETF reasonably fall?
The ETF price is currently $22.30 per share, but it traded around $20 per share just a few weeks ago. There seems to be strong, technical support at $20. I believe there may still be some pain ahead if The Federal Reserve is serious about fighting inflation and continues with high interest rate increases. In this case, it’s most likely that the ETF will fall to pre-Covid highs close to $18, which is not much further than the key $20 price point. Retesting the Covid low of about $13 in March 2020 is, of course, possible, but seems unlikely considering the improving Consumer Price Index inflation reports from the past several months and the improving fundamentals of BUG’s underlying core holdings.
Cybersecurity is debatably one of the most critical industries in the entire market right now with resilient, massive growth in the long term. Investors should consider accumulating shares of the The Global X Cybersecurity ETF at $20 and under and holding for the next decade. Your future selves will thank you.