The Top Cyber Security Companies to Invest in Right Now

Bryce: [00:00:31] Welcome to Get Started Investing feed podcast, where we help you learn to invest in 15 minutes or less. In each episode, we take one real world business story and apply a key investing lesson to help you build your investor toolkit. If you're joining us for the first time, welcome. We strongly recommend that you scroll up and start at episode one. While we are licenced, we are not aware of your personal circumstances. All information on this show is for education and entertainment purposes. Any advice is general advice only. But with that said, let's crack on. My name is Bryce and as always, I'm joined by my equity buddy, Ren. How are you going? 

Alec: [00:01:04] I'm very good. Bryce. It is December. The Socceroos a third of the round of 16. Yes. How can I not be good?

Bryce: [00:01:11] Big night overnight. Beat Denmark one nil.

Alec: [00:01:14] Yes.

Bryce: [00:01:14] Listen to this bonus episode.

Alec: [00:01:16] He called it. Yes, but that's not what we're here to talk about today. We are here to talk about cyber security. 

Audio Clip: [00:01:25] Names, numbers, email addresses and dates of birth. A cyber attack against Woolworths has exposed the personal information of more than two.

Audio Clip: [00:01:34] Medibank has revealed that the cyber attack on its customers' data is much wider than originally thought. The personal. Details. Of all of them. The health insurers, 3.9 million customers. In the hands of hackers. 

Bryce: [00:01:45] There's been plenty happening in the world of cyber security. We've had Optus, one of the telcos here in Australia was hacked. Yeah. Millions of customers' data was stolen then Medibank Private was hacked. Yep. One of the large private health insurance insurers here in Australia and a subsidiary of Woolworths, one of the largest grocery chains here in Australia, was also breached. So some pretty significant massive Australian companies have been breached. 

Alec: [00:02:16] But for us this isn't a recent story. As John Chambers, former CEO of Cisco, once said, there are two types of companies, those that have been hacked and those that don't know they have been hacked. 

Bryce: [00:02:27] Oh, really? 

Alec: [00:02:29] Or as Robert Mueller, famous for his Trump investigation, but the former director of the FBI once said, there are only two types of companies, those that have been hacked and those that will be hacked. 

Bryce: [00:02:41] Wow. 

Alec: [00:02:41] Cyber security. 

Bryce: [00:02:43] It's a big business. 

Alec: [00:02:44] It's a big concern.

Bryce: [00:02:46] Big concern. And so what it made us think is that, you know, we always say on the show that your surroundings, your environment is a great opportunity for you to take inspiration for an investment opportunity. And, you know, there's probably no greater example in the present moment than cybersecurity and what that means for us as investors and what opportunities are out there, too. I wouldn't say take advantage of hacking, but find an investment opportunity.

Alec: [00:03:12] Move to a jurisdiction where they don't have an extradition treaty with Australia. 

Bryce: [00:03:18] So it led us to thinking about ETFs that give you access to cybersecurity. 

Alec: [00:03:24] Yeah, I think this is the classic example of where if you don't want to invest, you don't have to invest in individual stocks when there's like a rising tide or a growing industry. And cybersecurity is the classic example where it's outside my circle of confidence big time. I couldn't tell you who has a competitive advantage between Cisco and Palo Alto Networks and all of these other companies with weird names. But the trend of cybersecurity being more important, businesses spending more on cybersecurity, governments beefing up their cybersecurity, that's only going in one direction. Yeah. 

Bryce: [00:04:01] So we've pulled two ETFs, one that is an Australian ETF and one that is listed overseas. 

Alec: [00:04:09] Yes. 

Bryce: [00:04:10] To compare the pair. 

Alec: [00:04:11] Well, yeah. Yeah. So this is where thematic ETFs can play an important role in your portfolio when you want to invest in the industry in the trend rather than picking individual stocks. So the starting point of this episode was let's have a look at some different cybersecurity ETFs listed in Australia. Turns out there's only one, so we figured we would take the one in Australia and compare it to the largest in the world, which just so happens to be listed in the US. And most, if not everyone these days can access the US. Yes. If a broker isn't giving you access to the US, change brokers big time that I'm just calling it now. We're licenced. I can say it if they're not giving you the US at least life. 

Bryce: [00:04:57] Yeah. 

Alec: [00:04:58] What we want to do here if you listen over on Equity Mates investing as well, Bryce has been talking about an ETF investing checklist that he's been building. The six pays, seven pays. Can't remember how many pays. We landed. 

Bryce: [00:05:11] Think it was between five and seven. 

Alec: [00:05:13] Yeah. He keeps promising an individual stock investing checklist as well, but he's we're.

Bryce: [00:05:18] Running out of time. 

Alec: [00:05:21] On that. So we want to talk about these thematic ETFs, how we analyse them and then apply prices six pays all in the next. 10 minutes. 

Bryce: [00:05:30] So it's we're looking at the. The first one is to hack its Betashares cybersecurity ETF. The ticker is hack H-A-C-K.

Alec: [00:05:39] And that's listed in Australia. 

Bryce: [00:05:40] Listed in Australia. And then the one that will compare it to is the world's largest. It's called the First Trust Nasdaq cybersecurity ETF. The ticker is C-I-B-R 

Alec: [00:05:50] And Bryce Just full disclosure, I own, Hack? 

Bryce: [00:05:53] Yes. 

Alec: [00:05:54] I'm not sure if you do.

Bryce: [00:05:55] I don't. 

Alec: [00:05:55] So, Bryce, before we get to your checklist, I just want to start with the top holdings because something stood out to me. So the biggest holding in Betashares ETF, Cisco Systems, 6.9% of the ETF, biggest holding in first trust ETF. Cisco Systems 6.9% of the ETF. Second biggest holding in Betashares. Infosys second biggest holding in first trust. Infosys third biggest holding in both of them. Broadcom, fourth biggest Palo Alto Networks. Are you suspecting something? 

Bryce: [00:06:31] I'm feeling a bit of a trend here. 

Alec: [00:06:33] And because it happens that all of the holdings are the same, it goes after that. CrowdStrike Holdings, science applications lead US Holdings and so on and so forth. 

Bryce: [00:06:46] Yes. So that's gone on to say. Yeah. 

Alec: [00:06:50] Well no but one's listed in the different companies, different names, different markets. 

Bryce: [00:06:54] Yeah. So what's who's copying? So what's happening here then is that they are both so first trusted in the States and Betashares here in Australia have both created an ETF that is tracking the same index, which is the Nasdaq, CTA or Consumer Technology Association Cybersecurity Index. 

Alec: [00:07:14] There you go. 

Bryce: [00:07:15] So you're saying you are buying exactly the same thing. And both companies have just and this is what ETF providers do. They themselves provide you access to the index. And so there is an index, the NASDAQ Consumer Technology Association Cybersecurity Index.

Alec: [00:07:31] So Betashares or First Trust aren't deciding which companies go in there. They are creating a product that tracks this index. Now, you said you're buying exactly the same thing. We should be careful with our words here because you're not buying exactly the same thing. You're buying the same underlying companies, but different currency and different management fees. 

Bryce: [00:07:54] Yes. Well, we'll get to that. 

Alec: [00:07:56] Sure. 

Bryce: [00:07:57] All right. So we've established that you're buying the same companies or the same exposure to the same index. All right. So to signpost things, let's go through my checklist. We start with purpose. And the questions here are, does this fit my investment strategy or does it make sense for what I'm trying to achieve? And here what we're saying is I'm looking for an ETF that gives me exposure to the cybersecurity world. That's that's the strategy. And this is a thematic ETF. This is part of my, I would say, satellite portfolio. 

Alec: [00:08:28] So give me the take. 

Bryce: [00:08:29] I'm giving it a T. 

Alec: [00:08:30] Okay. But it's also like a time horizon, isn't it. And stuff like. 

Bryce: [00:08:34] That. Yes. So that's the second PE which is a plan. 

Alec: [00:08:37] Not period plan. 

Bryce: [00:08:38] Plan. 

Alec: [00:08:39] But my plan includes a time period. 

Bryce: [00:08:41] Yeah. Time. 

Alec: [00:08:43] Okay. Yeah, time horizon. So in the.

Bryce: [00:08:46] Second horizon lifestyle, does this suit me? Can I, can I dollar cost average into this can this just sit here? Can it be an easy ETF for me to get into? 

Alec: [00:08:55] A lot of questions.

Bryce: [00:08:56] Yeah. So time horizon here. Good question. This is a satellite position. So it's not something that I would be saying is as 40 year time horizon as, say, an S&P 500. But it definitely has long term prospects, I guess, given the nature of cybersecurity, what do you think? 

Alec: [00:09:16] I'm just confused. Why couldn't the satellite positions be long term? 

Bryce: [00:09:20] Or they could be. They very much could be. 

Alec: [00:09:22] In fact, I would have gone so far as to say they should be all positions. Oh, well, you're not much of a trader. 

Bryce: [00:09:31] I'm not. Not. Yeah, no, but I'm. What I'm saying is that this probably requires a little bit more focus on what is going on in the industry. A broad based S&P 500. 

Alec: [00:09:42] Quantum computing comes and wipes out all of the existing cybersecurity players. 

Bryce: [00:09:48] Yeah. 

Alec: [00:09:49] This ETF is a little. Yeah, yeah. 

Bryce: [00:09:51] Or just hackers are wiped out. 

Alec: [00:09:54] Well, we just we just. 

Bryce: [00:09:55] And it's just not normal. 

Alec: [00:09:56] Crime and it's.

Bryce: [00:09:58] Not a thing. 

Alec: [00:09:59] Or Zuckerberg succeeds with the metaverse and we all have to have verified identities to get in there. Yeah. And therefore, there's no anonymity on the web anymore. 

Bryce: [00:10:09] Yes, it's a loose tech firm. Okay, plan. Let's keep moving next time. Overweight positions is an important one, and that is where we talk about do the positions or the companies in the portfolio actually align with the strategy of the portfolio? 

Alec: [00:10:25] Okay.

Bryce: [00:10:25] So this requires a little bit more due diligence and a bit of an understanding. 

Alec: [00:10:30] And just for the interest of time, I think we should just say they do, because we have looked at this ETF before and these are all pure-play cybersecurity plays. Or if they're not, they have a meaningful percentage of their revenue coming from cyber security. 

Bryce: [00:10:44] Yes. 

Alec: [00:10:45] So. Tick. Tick. Now, that's three purpose plan positions. Yeah. Before we do the next story, let's take a break to hear from our sponsors. All right, Bryce we're going through your ATF checklist. We are talking about cybersecurity today because it's in the news, it's front of mind. Optus, Medibank, there's been a few cyber security breaches recently. So we're talking about two ETFs at the same time. We're talking about Betashares cyber security ETF listed here in Australia, Hack and First Trust, Nasdaq security ETF listed over in the US because they tracked the same index. We've hit three of your pays in your six paycheque list over the year. What's next? 

Bryce: [00:11:29] The next one is price Ren And the big question here is, is this the cheapest option you have available to get the exposure that you want? 

Alec: [00:11:37] Cheapest in terms of fees? 

Bryce: [00:11:40] Yeah, management fees. 

Alec: [00:11:41] Okay. Not in terms of share price. 

Bryce: [00:11:42] No, share price doesn't matter. Okay. Yeah. Is this the cheapest option if you had ten that give you the same exposure lined up against each other? Is it the cheapest in terms of management fee? And if not, why? And you need to be able to justify why you're going with that one over the cheapest option. 

Alec: [00:12:00] So for these two ETFs that we're putting side by side, BETASHARES has a 0.67% management fee and first trust has a 0.6% management fee. 

Bryce: [00:12:12] So if you line them up against each other first, trust is the cheapest. 

Alec: [00:12:16] Now how do you weigh the Aussie dollar of a US dollar against that? So basically your choice is you pay betashares .67 percent a year, but it's in Aussie dollars, so there's no currency risk. All you pay first trust 0.6. So you save seven basis points in fees, but you get exposed to U.S. dollar currency fluctuations, which could be good, could be bad. Long term, may matter long term, may not matter. 

Bryce: [00:12:42] It's a good question. Right. And I think firstly, as a beginner investor, worrying about currency just for me anyway, just shouldn't be in the basket of things to think about when you start investing. I think it's something that when you're dealing with huge sums of money and you're right into it. Yes, perhaps. But the key thing to remember here is that you are still exposed to the US dollar, even if you buy the Australian listed product. Because all of the companies are listed over in the States, they are listed on the US stock market. So you're actually buying stocks in USD. This is not a company. You pardon the jargon here, but it's not hedged. It hasn't taken out currency risk. Yeah. So at the end of the day I would be going with the first trust because it's cheaper and it's fair enough. 

Alec: [00:13:26] Cheaper price. So because there's currency risk in each ETF. Yeah, yeah. Yeah. Makes sense. Nice. Alright so that's number four. What's number five?

Bryce: [00:13:34] Fifth five is performance Ren has four performance performances. What has been the historical performance? Now I know that past performance is no indicator of future, but it is good to have a look and say that it is this ETF, if it's a thematic, particularly a union in an industry that has generally been performing well.

Alec: [00:13:53] And the hack is down 25% yesterday. 

Bryce: [00:13:56] Hack's down 25% year to date, however, it is up 60% over the last sort of four years or so. 

Alec: [00:14:03] So it's a long term plan. 

Bryce: [00:14:05] So it's a long term play. It has performed well. In fact, at its peak it was up over 120%. So I think you could say that over the long term it has been performing well. Tech and then to close out Ren the final pay is prospects is this in an industry that generally has good growth potential over the next five years, over the next ten years, without having the figures in front of me, my gut feel says that cybersecurity is definitely an industry that is likely to continue to grow based on economic environment and the tailwinds behind it. More and more people are hacking those companies that haven't been hacked.

Alec: [00:14:46] Yeah.

Bryce: [00:14:46] And more and more companies are coming online and needing cybersecurity. 

Alec: [00:14:49] Well, Bryce, you don't have the numbers in front of you, but according to the 2022 Cybersecurity Almanac, I'm a subscriber. This is actually from a McKinsey report. The world spent about 150 billion on cybersecurity in 2021. They expect that to grow at 12.4% annually and they expect it to reach two that McKinsey have called it a $2 trillion market opportunity. I don't have the date that it's going to get to a trillion, trillion, but they say it's getting massive. And the reason they say it is going massive, according to McKinsey, quote, At the current rate of growth, damage from cyber attacks will amount to 10.5 trillion annually by 2025. 

Bryce: [00:15:30] Wow. 

Alec: [00:15:30] So that's why businesses and governments are willing to spend with these companies with funny names like Zscaler and Varonis Holdings. Darktrace. Yeah, because that is an investment that pays off. Yeah. One thing that I want to note, not in not the top holdings in the ATF we've spoken about today, but in another US, ATF, one of the top holdings is BlackBerry. 

Bryce: [00:15:53] There you go. They wouldn't have.

Alec: [00:15:55] Thought. Yeah, because it was always like when the iPhone first came out. BlackBerry was always more secure. Yeah, better for emails was one of the reasons and more secure was the other one like Obama. 

Bryce: [00:16:05] Presidents use them yeah.

Alec: [00:16:06] Yeah good on the Mexican around yeah. 

Bryce: [00:16:08] It's still kicking we're when we have kicks past our 15 minutes but I think it was it was worth it hopefully you've been able to take out of the episode nothing but the fact that you can see how we've tied a business news story to essentially trying to start the process of finding an investment.

Alec: [00:16:25] Opportunity. Yeah. And I think we should be very clear that your ETF checklist is a work in progress and trying to get through it all in 15 minutes. For one, we failed in 15 minutes. But to, you know, like some of those things we brushed over. Yeah, you want to do a little bit more work on. 

Bryce: [00:16:40] Underlying.

Alec: [00:16:40] Holdings, understanding what the holdings are, understanding what the prospects are. Yes. Yeah. But I think that gives you a broad overview of how we're thinking about ETF investing.

Bryce: [00:16:49] I love it. Well, if you've enjoyed the show or if you've taken value from previous episodes, please head over to iTunes and Rate and review if you can. We would really appreciate it, but otherwise, when we are fast approaching Christmas, it's the month of December, so we'll pick it up next week. It's an exciting time. 

Alec: [00:17:05] Sounds good.