Neena Mishra on How to Navigate Cybersecurity Boom Through ETFs

SPEAKER_1 (0:00)

So it's time now for our ETF watchlist segment. Joining me for this, Neena Mishra, Director of ETF Research for Zacks Investment Research. Thank you for being with us. So the concern was that AI was going to make cybersecurity obsolete. Turned out it was just the opposite. With all the AI fears, more demand for cybersecurity. What are you watching here on the trends of cybersecurity in this AI era?

Neena Mishra (0:27)

Yes. Cybersecurity ETFs have done so well this year. As you mentioned, these had sold off earlier this year because of concerns that AI is going to disrupt software. But as far as cybersecurity is concerned, and these stocks are concerned, it seems that AI is going to expand the opportunity.

Particularly after that hugging phase incident in July, when OpenAI models, they were able to escape their sandboxes, and they hacked hugging phase, which has now been acquired by NVIDIA. Since that incident, other companies, other AI companies, including Anthropic, Meta, Google, they have revealed that their AI models, their AI agents, they were also escaping sandboxes and accessing outside systems. So, remember last month, I think it was around September 14th, all these shocks, including CrowdStrike, Palo Alto, Zscaler, they had posted double-digit returns when all these AI leaders, they called for slowing down the pace of AI development. And in general, our world is becoming more digitized, more interconnected. So obviously, these cyber security breaches, incidents, they have been rising. And the need for cyber security continues to rise. So this is a must have expenditure. There are other areas which maybe CEOs may cut down if the broader economy slows down, but cyber security is an area that they cannot afford to ignore. So that is why these stocks continue to do well and all these ETFs that these have posted returns around 50% year to date.

SPEAKER_1 (2:33)

I thought it was interesting that you quoted the Wall Street Journal describing the cyber security moment. Cyber security's Jurassic Park moment.

Neena Mishra (2:40)

Yes.

SPEAKER_1 (2:41)

At this point, right? We were just talking about Anthropic and then we'll have OpenAI next year.

So the demand is here for AI, the growth is happening. We've heard a lot from the different companies that really echoes that. At this point though, with the cyber security, as you noted, names like Palo Alto, CrowdStrike and Zscaler have been doing quite well. We often pull up HACK, which is one of the ETFs that we look at very closely. That's one that caught your eye as well, right? Tell us a little bit about HACK and then we'll get to some of the others too.

Neena Mishra (3:12)

Yes. HACK, H-S-E-K by Amplify. This is the oldest product in this space. This launched just after that very high-profile Sony HACK by North Korean hackers. That is why this was one of the first ETFs to gather $1 billion within just a few weeks of its launch.

Since then, many other products have made their debut in this space. Currently, Cyber, CIBR by First Trust. That is the largest, most popular product. Then there is Bug by GlobalX and IHAK by iShares by BlackRock, which is the cheapest product in the space with an expense ratio of 47 basis points.

Now, some of these ETFs are more concentrated. Some have a little bit more diversified portfolio. IHAK, for example, holds about 50 stocks. Bug and others, they own between around 30 to 40 stocks. Investors can take a look at what these ETFs hold, and the expense ratios, and then decide which one works best for their portfolios.

SPEAKER_1 (4:29)

You talked so much about AI development and how quickly things are happening as well. A final thought here, because it doesn't seem to be slowing even with some of the recent AI fears, and some of the language that was enough to spook some folks.

Neena Mishra (4:49)

Yeah, as you mentioned, this was a cybersecurity Jurassic Park moment. So leaders are really worried about these cybersecurity risk caused by these AI models, because these are sci-fi like incidents, they just revealed that these models have become so powerful. So that is why cybersecurity is an area which looks a little bit expensive if you look at valuations. But it seems that these stocks may continue and ETFs may continue to do well.

SPEAKER_1 (5:23)

Great to see you. Thank you, Neena Mishra.

Neena Mishra (5:25)

Thank you.

SPEAKER_1 (5:26)

Zacks Investment Research. Thank you.