Cybersecurity: Investing In A Safer Digital Future

We live in a digital world. From remote work connections, e-commerce, electrical infrastructure and oil pipelines, so much of what has made global economies grow and move faster is because everything is “online” and connected.

But that expedience and convenience come at a cost: cybercrime vulnerability. Rising geopolitical tensions, the growing adoption of cryptocurrencies, digitization and rising cybercriminal sophistication put our infrastructure – both digital and traditional – at greater risk. Even a non-malicious faulty software update, can trigger a global IT outage.

The stakes are higher than ever, and keeping critical systems online, safe and secure is vital. To safeguard our digital future, countries, companies and consumers are investing in cybersecurity to ensure it. Let’s take a look at the investable potential of cybersecurity, a US $2 trillion-dollar market.

Global X Investments Canada Inc. (“Global X”) offers an entry point into this sector with the Global X Cybersecurity Index ETF (HBUG).

“HBUG might be a good way to diversify your tech exposure by investing in a space that has long-term tailwinds to capitalize on,” says Alex Smahtin, Senior Analyst of Investment Management at Global X.

HBUG invests in the US Dollar Global X Cybersecurity ETF (BUG). HBUG seeks to hedge any U.S. dollar portfolio exposure back to the Canadian dollar at all times.

The impact of cybercrime is staggering. Since the COVID-19 pandemic, cybercrime has increased by 600%. In Canada, the average cost of a data breach was estimated at $5.64 million while in the U.S., the average cost of a data breach was US$9.4 million, according to research conducted by Mastercard. By 2029, global losses from cybercrime are forecast to reach US$15.63 trillion.

“It’s an industry that is understandably poised to grow alongside the tech industry at large,” Global X’s Smahtin adds.

“The increasing frequency and severity of cyberattacks will coincide with an increase in regulatory scrutiny around protecting people’s data and cybersecurity.”

The cybersecurity industry isn’t all doom and gloom and you don’t need a Master’s in Computer Science to carry out simple cybersecurity practices. You’re already doing the following activities in your day-to-day life:

The cybersecurity industry is a lucrative market. Global revenue for the cybersecurity market is expected to show a compound annual growth rate (CAGR) between 2024 to 2029 of 7.92%, resulting in a market volume of US$271.9 billion by 2029, according to Statista Market Insights. Professional services firm McKinsey values the overall industry at US$2 trillion.

Cybersecurity companies provide a range of solutions, mainly concentrated in the following areas:

Endpoint security providers have traditionally focused on protecting a network’s perimeter by securing entry points across connected devices, such as computers and phones. Solutions in this industry subsector have evolved from traditional antivirus software to comprehensive protection from sophisticated malware.

Network security vendors aim to protect the users, data and apps within a network’s perimeter, minimizing access rights and duration to reduce overall information-security risk within the system.

Here’s a brief look at a number of leading companies in the cybersecurity industry:

In terms of public market mergers and acquisitions (M&A) deals, during the second quarter of 2024, Cisco Systems completed its $28 billion acquisition of cybersecurity firm Splunk. The previous significant industry deal was Google’s US$5.4 billion acquisition of Mandiant, which was completed in 2022.

According to industry data compiled by San Francisco-based Bessemer Venture Partners, public cloud cybersecurity companies command higher valuation multiples, primarily due to their operational efficiency and faster growth rates.

The increasing focus on security has led to more robust and resilient cybersecurity budgets, making these companies less susceptible to fluctuations in enterprise spending. This trend is further driving the growth of public cloud cybersecurity firms.

Note: Data calculated by Bessemer Venture Partners based on the BVP Nasdaq Emerging Cloud Index as at April 30, 2024. Cybersecurity companies include Cloudflare, CloudStrike, Okta, Qualys, SentinelOne, Tenable, and Zscaler. Infrastructure companies include Datadog, DigitalOcean, Elastic, Fastly, Gitlab, Jfrog, MongoDB, PagerDuty, Snowflake, and Twilio. Numbers are median valuations and multiples.

Cybersecurity firms are continuing to be bought up as high-profile cyberattacks and outages put the industry in the spotlight. Deals announced so far in 2024 have already grown 32% to $3.4 billion, according to Bloomberg News.

Phil Adams, Managing Director and Global Head of Technology at investment bank Houlihan Lokey reckons the rise of artificial intelligence is increasing business risks and the demand for cybersecurity.

“AI threats are becoming very real and companies are seeking ways to avoid those attacks,” Adams told Bloomberg News. “We’re seeing an increased interest in cybersecurity firms as a result.”

In May, private equity firm Permira announced it was buying Israeli fraud protection firm BioCatch. CyberArk Software agreed to buy machine identity firm Venafi that month and cloud security firm Wiz is valued at US$12 billion, based on its latest funding round. As well, a multi-billion-dollar valuation Wiz has attracted buyout interest from Google’s parent company Alphabet, although it has decided to go it alone and rebuff the offer.

The Russia-Ukraine conflict has brought cyberattacks and disinformation to the forefront of modern warfare. Although the damage has been limited so far, thanks to Western support bolstering Ukraine’s cyber defenses, the emergence of hybrid warfare is now a stark reality.

Russia’s interference in recent U.S. presidential elections highlights how foreign adversaries can exploit cybersecurity weaknesses and manipulate social media algorithms to distort politics. The advent of generative AI, capable of creating deepfake photos and videos, poses an even greater threat, requiring more advanced cyber defenses.

In response, the U.S. government is making significant investments in cybersecurity. The Pentagon is set to receive $13.5 billion to advance its adoption of zero-trust architecture—systems that continuously verify user access. Additionally, $12.7 billion is allocated for civilian cybersecurity-related activities, underscoring the critical need to fortify defenses against evolving cyber threats.

As more and more devices and systems come into contact with the wider Internet, their vulnerability to attacks from malicious parties increases. The COVID-19 pandemic has forced organizations to rely on remote access to ensure operational continuity. Cyberattacks are an even more significant threat to critical infrastructure which includes energy and utility companies.

The JBS cyberattack struck the largest meat processing firm in the world and cost the company US$11M in ransomware payouts. An attack on the Colonial Pipeline Project left a major piece of U.S. infrastructure completely inoperable, causing disruption to millions and sending ripples across the markets. 

With so much at stake when it comes to securing data for governments and corporations, there is a cybersecurity skills gap: an estimated 4 million professionals are needed to fill roles in the industry. Factors such as the lack of a defined career path, unrealistic expectations from employers and expensive certifications may discourage entrants into the cybersecurity field.

During the COVID-19 pandemic, the White House hosted a security summit to strengthen U.S. government and industry defenses with technology industry participants announcing programs designed to boost cybersecurity training. By 2026, Google says it will invest $10Bn to expand cybersecurity efforts known as zero-trust programs, help secure the software supply chain, and enhance open-source data security. Microsoft announced that it will invest $20Bn in cybersecurity-related initiatives.

There are different ways of investing to potentially benefit from opportunities in the cybersecurity field. Investors can buy individual stocks in cybersecurity companies. Alternatively, investors can consider a cybersecurity-focused investment vehicle, such as an exchange traded fund (ETF).

ETF investing can offer potentially greater diversification than just holding individual stocks. This can help reduce the risks associated with investing in just one or two companies.

HBUG from Global X seeks to replicate, directly or indirectly, the performance of the Indxx Cybersecurity Index, net of expenses, by investing primarily in the Global X Cybersecurity ETF (BUG).

*Plus applicable sales tax

BUG, in which HBUG invests, is globally diversified. Reflecting the global nature of the cybersecurity industry, approximately 30% of this ETF is allocated to non-North American securities.

Global X offers a world of opportunity with global possibilities. For more information on our extensive suite of ETFs, visit www.GlobalX.ca.

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Published August 1, 2024