The recent high-profile hack of the Colonial pipeline has sent shockwaves through energy markets. Several Southeast and lower Mid Atlantic states saw the highest gasoline prices in more than six years on this news. The deep effects of this hack on society monumentally raised awareness about hacking risks.
Unfortunately, cyber security attacks are a growing trend. Various hacking groups are increasingly targeting larger corporations, and for larger amounts. It seems as though no major corporation is immune to these risks. Accordingly, investors may want to consider how to invest in such an environment.
On the one hand, pricing in the risk of a major hack into any stock is difficult to do. After all, it’s a small tail risk that is inherent to practically any stock out there.
On the other hand, investors who believe these risks are likely to remain prevalent for some time do have an option: going on the offense by investing in cybersecurity. There happen to be a range of high-quality cybersecurity options in the market today. Various competing companies seeking to innovate in preventing cyber attacks beckon to such investors.
Passive Thematic Investing Gaining Traction
Exchange traded funds have been primarily in the purview of passive investors for some time. Various index funds tracking a broad basket of stocks across an entire index have appeal for various reasons. They’re cheap, usually with management expense ratios (fees) of 10 basis points or less. Additionally, they make investing simple. For a passive investor, it is sensible to place all of one’s money into an automatically-diversified portfolio and forget about it.
What about investors who want sector-specific exposure, without having to pick winners in a given sector? Enter thematic ETFs such as IHAK.
Thematic ETFs have grown in size and relevance to all investor types, active and passive alike, due to their liquidity and the diversification they provide. Thematic ETFs do carry a slightly higher Management Expense Ration (MER) and are slightly less liquid than their index ETF counterparts. However, they do the job quite nicely for investors looking to amp up exposure to a particular sector.
As far as thematic ETFs go, IHAK is one of the best in the market today. Cyber security as a secular theme is likely to remain in boisterous demand over the long-term. As technological innovation continues forward, companies will be forced to innovate in how they protect their valuable IP and customer data.
Current spending trends, in terms of corporations’ investments in cyber security investments, remain muted. However, many expect cyber security spending to ramp up as a percentage of corporate budgets over the long-term.
Picking a winner in this space is certainly a difficult task, and there’s nothing wrong with feeling uncertain about where the competitive landscape will be ten years from now. Nonetheless, spreading one’s bets across a high-growth sector like this certainly has its benefit.
Disclosure: Chris MacDonald held no position in any of the stocks mentioned in this article at the time of publication.
Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.