2022 will be the year most investors want to forget. Not only is the S&P 500 (SPY) and Russell 2000 (IWM) down nearly 20% of his, this year has completely reversed the trend that saw investors gain the most during his post-COVID recession. Did. Back then it was all about megacaps, technology, growth and the FAAMG name. The big winners this year are dividend stocks, low volatility and value. Many investors have been put in the wrong position this year, which may have led to even bigger losses.
The tech sector could drop 30% this year. Inflation, interest rates, and a slowing economy all weigh against us, and we’ve been consistently lagging in the past year. On top of that, the valuation required a lot of unwinding, which only exacerbated the loss. Some returns get even worse when you drill down to the subsector level. Stocks in cloud computing (SKYY), internet (FDN), robotics (BOTZ), and blockchain (BLOK) are all on pace to lose 40% or more. If you were overweight in 2022, you are going through a lot of pain.
One sector that is doing at least a little better is cybersecurity. Like other tech sectors, it has fallen sharply, but has benefited from a steady stream of ‘demand’. The concept of identifying and preventing data breaches and hacks is now applied to nearly every sector of the economy and daily life. The good news for cybersecurity stocks is that companies and governments are investing billions of dollars to protect their systems, data and infrastructure. It’s one of the undisputed true growth sectors that is becoming defensive in nature. Cybersecurity may remain immune to economic cycles.
The problem today is that the cybersecurity sector is still pretty expensive. The S&P 500 P/E ratio is back at around 17, but cybersecurity still trades at around 26 times earnings. If, as many watchers expect, a recession actually arrives in about 12 months, cybersecurity stocks could underperform further just from shrinking valuations. Cybersecurity stocks could face another tough environment in 2023 as values dominate the narrative for the time being.
From a long-term buy-and-hold perspective, cybersecurity still makes a lot of sense. Combined with long-term growth potential and increased demand for services, adding an overweight to this sector could be a way to steer the portfolio toward above-average returns.
Cybersecurity ETF Ranking
With so many different ETF options out there, it can be a little difficult to distinguish between the best and the worst. You’ve heard most financial experts talk about focusing on funds with low expense ratios. It can certainly be a big factor in deciding which ETF to use (and in my view it’s probably the most important factor), but there are many things to consider in making the right choice. increase.
Here I am trying to make things easier for you. Using a methodology I have developed to take into account many factors to consider and weight them according to their perceived importance. allows you to rank the universe of available ETFs and identify the best ones. for your portfolio.
Now, this is certainly not a perfect ranking. I simply share his years of experience in the ETF space helping investors build smart, cost-effective portfolios.
Ranking ETF Methodology and Factors
Before we get to the point, let’s establish some ground rules.
First, all data used are from ETF actions. They looked at the ETF universe to identify and categorize the ETFs used here. There are many that qualify and I will use their taxonomy as a starting point.
Now let’s summarize the factors we used in our ranking methodology.
- expense ratio – This is probably the most important factor as it is the only factor the investor can control. If you choose a fund with an interest rate of 0.1% over a fund with an interest rate of 1%, you automatically gain an interest rate of 0.9% per annum. You can’t control what the fund returns, but you can control what it pays out to your portfolio. The lower your expense ratio, the more money you have in your pocket.
- Spread – This has to do with how cheap the stock can be bought and sold. In general, the larger the fund, the lower the spread. Larger funds usually have many buyers and sellers. Therefore, it is easier to find stocks to trade and cheaper to trade. Smaller funds, on the other hand, tend to have fewer shares traded, and investors often have to pay a premium to buy and sell. Considering the expense ratio and spread together usually gives a better picture of the total cost of ownership.
- Diversification – Generally speaking, the wider your portfolio, the more likely you are to reduce your overall risk. Funds such as the Energy Select Sector SPDR ETF (XLE) are a good example. 45% of the fund’s total assets are allocated only to his two shares in ExxonMobil and Chevron. By purchasing XLE you put a lot of trust in just these two companies. Equal-weighted funds such as the Invesco S&P 500 Equal Weight Energy ETF (RYE) score higher in diversification than XLE.
- FactSet ETF Score – FactSet calculates its own ETF rankings for efficiency, tradeability and suitability. They are basically designed to show if the ETF is doing what it sets out to do. I’m not going to copy and paste the work they do, but there is some impact there to make sure my rankings are on the right track.
There are some other minor factors in the mix, but these are the main ones that are taken into account.
One thing that is not considered is historical returns. Most ETFs are passively managed, simply trying to track the index and not outperform. An ETF should not be penalized for low returns just because the index it tracks is currently unsupported.
We rank ETFs based on more fundamental structural factors. Are they cheap to own? Are they liquid? Do they minimize transaction costs? Do they maintain a diversification effect that reduces risk?
Being in the bottom half of the list doesn’t automatically make the fund “bad”. This simply means that a low asset base, high expense ratios, portfolio concentration or other factors create additional costs and downside risks.
Best Cybersecurity ETF Ranking
The world of cybersecurity ETFs is somewhat limited. Just one ETF accounts for more than half of the sector’s assets, with almost all assets in a total of four ETFs. Although the number of options is relatively small, these portfolio construction methods are unique enough that they are not necessarily compatible.
of ETFMG Prime Cyber Security ETF (HACK) first entered the market in 2014. Amid the initial cybersecurity boom, the fund has put him in over $1.4 billion in assets in less than a year. Today, it’s still his second-largest ETF in this space, but relatively lackluster performance robs this portfolio of luster. HACK has some differences. Despite cybersecurity being a truly global industry, the fund holds nearly 90% of his assets in US-based companies, the highest number in this group. It also has the lowest percentage of top 10 holdings and almost the highest individual positions at 59. In other words, this is probably the most diversified fund on this list. In many cases that’s a good thing, but for sector-specific funds it may not be. Many investors are likely looking for more focused exposure when investing in a sector, which HACK does not always provide. It has also been the worst performing ETF in its long history in the past three years.
of First Trust Nasdaq Cybersecurity ETF (CIBR) was the second cybersecurity to launch, but has since become the industry’s torchbearer. I think this ETF is slightly better positioned than HACK. It has a little more international exposure and only 37 individual holdings. As such, CIBR is a bit better for pure play in this sector. It’s a bit top-heavy, so it’s a little more risky from the individual names, but overall he prefers his CIBR over HACK, based on the composition of the portfolio.
None of these ETFs occupy the top spot in my ranking.the honor is iShares Cybersecurity & Tech ETF (IHAK)A lower expense ratio is certainly what pushed IHAK to the top, with a large enough asset base, high tradability and tight spreads. From a composition standpoint, IHAK has one of the better global allocations (only 75% of its assets come from US companies), with a modest allocation to emerging markets, and more than most other funds in this category. There is nothing. It also skews the most towards mid-cap and small-cap stocks. From a risk perspective, this ETF is probably on the high end of the spectrum, but the cost and diversification benefits make it a natural choice for the #1 pick.
However, if I were to choose a cybersecurity fund for my portfolio, I would probably Global X Cybersecurity ETF (Bug)It does perhaps the best job of providing concentrated exposure, with a portfolio limited to just about 25 names, while offering a geographically diverse allocation strategy. US companies and foreign developed market companies. It is split approximately 2/3 to 1/3 between the two, including a 14% allocation to Israel, the world’s fastest growing technology hub. It also owns approximately one-third of each of large-cap, mid-cap, and small-cap assets. An expense ratio that is 10 basis points lower than both HACK and CIBR offers another advantage.
of WisdomTree Cybersecurity ETF (WCBR) is approaching its two-year anniversary and hasn’t really gained any traction. Its cost rate was the lowest of its flock, but its relatively late entry into the game was a matter of its ability to steal market share from the bigger names.
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