Surge in demand for cybersecurity

This article is part of
Winter Investment Monitor - December 2015

Cybercrime has dominated the headlines in recent months, and there have been growing concerns around the threat of cyberattacks on retailers ahead of the traditional Christmas shopping period.

A recent report by ThreatMetrix predicts a significant spike in cybercrime in the run-up to the festive season. With a 25 per cent increase in cyberattacks against online retailers already reported this year, there is substantial evidence to suggest this concern is well placed.

The good news is that the cybersecurity industry is working hard to meet this increasing need. The products and services delivered by specialist cybersecurity firms are in high demand as spending by governments and corporations in the area rises.

Article continues after advert

For investors, these cybersecurity businesses may offer a growth-oriented investment opportunity.

The global growth prospects from the sector are compelling. Since 2009, reported cybersecurity incidents have grown at a year-on-year compound annual growth rate of 66 per cent.

As this threat grows, cybersecurity firms are likely to experience a continued and increasing demand for their services.

The cyber-insurance industry – mainly a US market for the time being – has grown from $1bn (£667m) to $2.5bn in the past two years and is expected to grow dramatically during the next five years.

In addition, the mobile security market is exploding, with more than 30 per cent growth projected through to 2019, driven by the mass adoption of smartphones, tablets, and other mobile devices.

These figures are borne out in the growth predictions for the sector as a whole. Current research forecasts that the global cybersecurity industry will expand at a compound annual growth rate of 9.8 per cent to $170bn by 2020.

Investors can access this market in Europe in two ways: either directly by conducting research and buying stocks in individual-listed stocks, or simply buying single exchange-traded funds (ETFs).

Investment in an individual stock will provide the most targeted exposure. But this approach requires investors to pick the winners and losers in the industry at an early stage in the maturity of the sector.

If an investor wants more diversified exposure to cybersecurity firms directly, they will need to spend meaningful amounts of time to review their holdings to rebalance their investment at regular intervals. This ensures they stay aligned with their overall objective of having a balanced broad exposure to the sector.

On the other hand, ETFs that are designed to provide a balanced and diversified exposure to cybersecurity firms have an in-built rebalancing mechanism that allows investors to track the performance of a basket of companies that are professionally selected via rules-based methodology.

These products trade on stock exchanges and investors can therefore trade them with the same ease as they would with a stock without having to regularly rebalance their holdings.

ETFs are typically being used as building blocks in portfolio construction.

So a cybersecurity ETF, with its relative simplicity and flexibility, can be an integral investment tool for investors looking for exposure to the forecasted growth in this sub-sector.