A great way to diversify an ISA is through exchange-traded funds. The benefit of these is that I can own a slice of many different firms through a single investment. I find that an attractive proposition.
Having said that, I only own a couple of ETFs because I prefer to pick individual stocks. But one of them is L&G Cyber Security UCITS ETF (LSE: ISPY), which is a fund that I intend to hold long term. Here’s why.
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A vital industry
They say nobody can predict the future with certainty, which is true. However, I do think certain trends are almost inevitable and it can pay for investors to get some portfolio exposure to them.
For example, it seems clear to me that digital transactions will continue growing at the expense of cash. That’s why I hold shares of Visa, Mastercard and MercadoLibre.
Cloud computing is another, along with e-commerce and artificial intelligence (AI). And I’d put cybersecurity right up there too, as hardly a day goes by now without a new major hacking incident.
On 17 June, for instance, it was reported that cybercriminals who hacked customers of cloud data-storage firm Snowflake demanded payments of between $300k and $5m from each company.
Meanwhile, NHS Dumfries and Galloway recently told people in the region that their data is likely to have been published online following an “extremely serious” hack.
I expect cloud platforms, companies, governments and organisations like the NHS to spend more on cybersecurity as time goes on.
An AI arms race
Today, hackers are also increasingly using AI to develop malware and launch sophisticated attacks. So an AI arms race is emerging, where both attackers and defenders use AI to gain an advantage.
We’re seeing an explosion of new threat actors that…can use generative AI to advance their attacks very quickly and to make them scalable. There’s going to be a greater proliferation of adversaries than we’ve ever seen. And that is just going to grow, probably exponentially.
George Kurtz, CEO of Crowdstrike
The ETF
The L&G Cyber Security ETF aims to track the performance of the ISE Cyber Security UCITS Index. It held 39 different cybersecurity-related stocks as of 31 May.
Top 10 holdings
| Portfolio weighting (%) | |
| Darktrace | 7.3% |
| Gen Digital | 6.0% |
| Palo Alto Networks | 5.8% |
| Broadcom | 5.6% |
| CrowdStrike | 5.5% |
| Cisco Systems | 5.2% |
| Check Point Software Technologies | 5.0% |
| Ziff Davis | 4.9% |
| Fortinet | 4.9% |
| Akamai Technologies | 4.8% |
There are some top-class companies in there, notably Palo Alto Networks, Broadcom, Fortinet and CrowdStrike.
Now, one thing to note here is that the ETF carries a 0.69% ongoing charge, which can eat into returns over the long run. This is something I can stomach when the performance is strong — the share price is up around 200% in less than 10 years — but it’s something to keep an eye on.
Another issue is that some of these stocks are currently trading at very high multiples. CrowdStrike, for example, has a forward price-to-earnings ratio of 92! So valuations might be a little stretched across parts of the industry lately.
However, I remain very bullish long term, especially looking at some of the industry forecasts. Bloomberg Intelligence, for example, sees generative AI cybersecurity spend growing from just $9m in 2022 (when ChatGPT came out) to $14bn by 2032.
That’s a 108% compound annual growth rate!
I intend to hold this ETF over the long term as the world increasingly relies on technology, making cybersecurity a must-have.
