2022 was a difficult year for technology companies and the prospect of volatile market conditions continuing into 2023 could continue to challenge technology investors.

While it may be a ‘long winter’ for many technology-focused industries, could the cybersecurity sector potentially be a smarter way to get technology exposure?

The global digital economy is expected to reach $25 trillion¹ within the next five years, but the added convenience and growth opportunities offered by doubling down on the digital world carry significant risk.

Increased digitization, substantial growth in artificial intelligence (AI), the Internet for Things (IoT), and cloud computing have escalated the risks of inadequate cybersecurity from leaking passwords to matters of national security. Year-over-year, 28% more cyberattacks occurred in Q3 2022 than in Q3 2021.²

For the most part, cybersecurity infrastructure has lagged behind advancements, leaving large gaps in protection from the consumer level to the top of corporations. This is costing tens of billions of dollars and, at its current growth rate, it will cost more than 10 trillion dollars of damage by 2025.³

As governments and large companies prepare themselves to address the growth of cyberattacks and warfare, the forecasted trajectory of the cybersecurity sector presents an attractive long-term investment profile for investors looking for an industry with potentially stable upside growth.

Cybersecurity Related Quick Facts

What is influencing cybersecurity growth?

The more we have integrated technology into even more mundane aspects of our life, the more at risk we are to cyberattacks. As technological development leans into automation, devices are built to communicate with one another to complete tasks that humans no longer think about (like remembering passwords, locking and unlocking doors, and turning lights on and off. However, as these lines of interaction in the ecosystem of technology reach further, the opportunities for cybercriminals to exploit them are increasing.

Cyberattacks can be overwhelmingly costly, impact company reputability, and compromise the sensitive data of individuals. As at November 29, 2022, according to Statista, in the third quarter of 2022, approximately 15 million data records were exposed worldwide through data breaches¹⁰ — a growth of 37% compared to the previous quarter of the same year.

Key Areas of Potential Growth

The sheer speed of global digitization has led to cracks forming in information-sharing infrastructure. When the issue reaches government organizations, the stakes can become even graver, including limiting access to healthcare and hospital resources ¹². IBM reports that  the average data breach is estimated to cost USD 9.44 million in the United States and USD 4.35 million globally in 2022, a growth of 11.9% since 2015. ¹³

Cloud access, from a work computer to a personal computer or phone, can also pose significant security risks for corporations. Consequently, demand for cloud-based threat detection solutions is anticipated to see significant growth in the coming years. Market predictions for 2023 anticipate 26.6% growth ¹⁴ among cloud access security brokers and cloud workload connection platform protection.15

Solutions development is top of mind for significant market players ¹⁶ like IBM, Palo Alto Networks, Fortinet, and Cisco, who are developing AI-based software products to help reduce the frequency of mass breaches. There are also large-scale governmental investments in research and development (R&D) from Germany¹⁷, France¹⁸, India¹⁹, Spain²⁰, South Korea²¹, Italy²², Canada²³, and Qatar²⁴ underway.

These ventures aren’t just for the sake of enhancing digital security for the masses – they represent a real investment opportunity. Valued at USD 217.9 billion globally in 2021, the cybersecurity sector is anticipated to grow from USD 240.27 billion in 2022 to 345.4 billion by 2026²⁵.

Cyber Warfare and Government-backed Risk Management

Recent cyberattacks against Ukraine and related allies,²⁶, carried out by Russia have illustrated the immediate risks of inadequate cybersecurity infrastructure. These attacks and breaches, carried out either to harm the Ukrainian government or “test” their capabilities of weakening systems, could be a foreshadowing for neighbouring European countries²⁷ and allies with similar infrastructures.

In May 2021, U.S. President Joe Biden signed the executive order, Improving the Nation’s Cybersecurity²⁸. The order offered robust funding for the United States to improve safe connectivity between the government and private sector through the early detection and reduction of cyber threats on Federal systems. The order includes $65 billion in proposed²⁹ spending on IT at civilian agencies in fiscal year (FY) 2023, to deliver critical public services, and keep sensitive data and systems secure.

Subsequently, on October 11, 2022, the U.S. Government announced³⁰ that The State and Local Cybersecurity Grant Program will provide $1 billion in funding to state, local, and territorial (SLT) partners over four years to support SLT systems risks management. In addition, the budget allotted roughly USD 10.9 billion for civilian cybersecurity-related activities – an 11% increase from 2022’s spending proposal.

The U.S. is far from alone in its approach. Globally, approximately USD 150 billion was spent on cybersecurity implementation in 2021, representing an annual growth of 12.4%.³¹.

Outside of the United States, Israel is the only country that falls within the top three regions for cybersecurity innovation³². Influenced by government-supported initiatives dating back to 2017, and a steep increase in cyberattacks during the COVID-19 pandemic, in 2021 funding for cybersecurity-related businesses grew to USD 8.8 billion³³ in the country. In comparison to the broader sector’s growth, the Middle East’s market share is projected³⁴ to grow from USD 20.3 billion in 2022 to 44.7 billion within 5 years, actualizing a CAGR of 17.1%.

Multinational companies like ORACLE, Dell, and IBM all prioritize R&D in Israel³⁵ as a recognized pioneer of innovation, thus contributing to the flow of funding to the region. Yearly, 40% of private global investments³⁶ have been acquired in Israel alone. Their emulated 360-degree approach to cybersecurity investment includes numerous programs that teach cybersecurity in schools and universities³⁷ and provide millions of funding for early start-ups to keep the revolving door of innovation in rotation.

Focus on Leaders:

One differentiating factor between the Cybersecurity industry versus other thematic technology sectors is that the importance of emerging companies is less than scale and capitalization. Since cybersecurity spending would be focused on a core security concern, having an established company with credibility in the sector is of paramount concern. This tends to have revenue growth favouring the larger more established names in the industry. For this reason, the Indxx Cybersecurity NTR Index utilizes a higher market cap than other cybersecurity strategies with a $200 million threshold for inclusion. Constituent securities are also market cap-weighted (although capped at 6% on rebalance), which provides a greater breadth of exposure to the leaders in the sector.

If you’re seeking to include some technology exposure in your portfolio, whether based on long-term conviction or because you believe a tech rebound may be on the horizon, doing so through a cybersecurity ETF could be a smarter way to invest in technology in 2023.

Cybersecurity Sector Market Trends

Following over 430 major transactions in 2021³⁸, industry juggernauts continue to push substantial mergers in the fourth quarter (Q4) of 2022. Cybersecurity-related mergers and acquisitions saw substantial growth trends at the top of Q4 2022, after a brief slow in Q3 2022. Within the first month of the quarter, USD 6.90 billion was exchanged in acquisition deals³⁹. The majority of these were carried out by large-sized companies located in North America and Europe. Most notably Thoma Bravo LP closed the USD 3.01 billion purchase of identity security platform, Ping Identity Holding Corp.⁴⁰

It is highly unlikely for this trend to slow as 46% of CEOs anticipate involving Chief Information Security Officers (CISOs) in the race to reduce risk. Globally, CISOs are calling for heavy R&D in security automation to build the lacking in-house infrastructure to address security targets. As a result, worldwide, spending on security and risk management is poised to grow 11.3% in 2023 to over USD 188.3 billion.⁴¹

The Investment Case for Cybersecurity: HBUG

Cybersecurity is a sub-industry of the technology sector that seems to have real fundamental drivers of growth. Regardless of the valuations of technology companies, there will continue to be a need for firms in all sectors of the economy to invest in cybersecurity.

The Horizons GX Cybersecurity Index ETF (HBUG) provides global exposure to global, publicly listed companies that stand to potentially benefit from the increased adoption of cybersecurity technology, such as those whose principal business is generally engaged in the development and management of security protocols that prevent intrusion and attacks to systems, networks, applications, computers, and mobile devices.

Launched in December 2021, HBUG seeks to replicate, to the extent possible and net of expenses, the performance of the Indxx Cybersecurity Index by investing primarily in the Global X Cybersecurity ETF, which trades on the NASDAQ stock exchange under the ticker BUG. HBUG seeks to hedge any U.S. dollar portfolio exposure back to the Canadian dollar at all times.

Features

Why Consider HBUG and Cybersecurity in 2023?

Overall, 2022 was a difficult year for the broader technology sector. Many technology companies – from blue chip incumbents to newer entrants – saw double-digit losses in market capitalization, alongside the tech-heavy NASDAQ index. High valuations and several macroeconomic factors, including rising interest rates and the ongoing war in Ukraine have contributed to the challenging landscape for technology companies and could continue to loom over the sector into 2023.

The cybersecurity sector, as represented by the Indxx Cybersecurity Index, the underlying index for both HBUG and BUG, returned -33.23% in 2022, as at December 31, 2022, underperforming the U.S. technology sector, as represented by the Technology Select Sector Total Return Index (IXXTR), however, it outperformed other key thematic technology sector indices, such as the robotics and A.I. sector, as represented by the Indxx Global Robotics & Artificial Intelligence Thematic Index and Cloud Computing as represented by the Indxx Cloud Computing Index.

The indicated ETF rates of return are the historical annual compounded total returns, including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. The indices are not directly investible. Only the returns for periods of one year or greater are annualized returns.