Through Christophe Gannatti, CFA, research manager, Europe
Investors in 2020 and 2021 have become familiar with a somewhat natural âflowâ and âflowâ of the performance of different megatrends. A positive performance is always preferred, but the risk of being âtoo positiveâ is that investors start to think they âmissed itâ or that a âcorrection is imminentâ. With broad references continually flirting with new records in early November 2021, these are natural concerns.
Can a business exist without cybersecurity?
A question for anyone reading this blog post: take a step back and think: would you do business, any business, with a business that has no any cybersecurity strategy in 2021?
Even with all the technological advancements seen across the world, cybersecurity remains a notoriously difficult space for the more positive forces to clearly triumph over the nefarious ones. Take the case of SolarWinds:
Since May 2021, the hackers responsible for the SolarWinds attack have targeted more than 140 technology companies. Rarely do such attacks have a 0% success rate. Techniques as simple as guessing user passwords or phishing emails are sometimes enough to give them the access they want. Russia may seek systematic and long-term access to various points in the technology supply chain.1
It is also important to consider that real âfixesâ take time. Publicity for the SolarWinds attack was in full swing about a year ago, and yet it wasn’t until the first week of November 2021 that the Biden administration ordered U.S. federal agencies to correct hundreds of cybersecurity vulnerabilities. These actions covered around 200 known security vulnerabilities that were discovered between 2017 and 2020, and another 90 that were discovered in 2021.2
Focus on the future of cybersecurity
WisdomTree benefits from working with expert partners on many of its megatrend approaches. In the area of ââcybersecurity, WisdomTree works with Team8, a venture capital firm with strong cybersecurity expertise and a management team that includes a former director of NSA and Unit 8200.
While it’s hard to believe that people are questioning the importance of cybersecurity, it’s far from certain which businesses or services will see the most growth or adoption. Team8 has developed a list of seven critical themes within cybersecurity that they believe will define the types of services that should have the best chance of future success. These seven themes are:
- Smarter Security: Investors should think about the intersection between technologies related to artificial intelligence (âAIâ) and machine learning, and how these technologies can be used to improve the security of digital systems.
- Resilience and recovery: Investors should be mindful that no security is ever 100% effective, so strategies must exist for possible recovery after a hack.
- Cloud Security: In a world where employees demand to âwork from anywhere,â more and more people are using cloud software. If not done carefully, it creates a lot of vulnerabilities.
- World without perimeter: In the past, the network was centered on a specific office or location. The world of 2021, more and more, is location independent when it comes to software, networks and data.
- Shift-left: The proliferation of the âapp economicsâ has been amazing, making it increasingly critical for developers to think about security at every phase of app development rather than as an afterthought once all. development is complete. Developers must learn and predict how sophisticated attacks, like SolarWinds, might be implemented, building on efforts to defend against them within the digital infrastructure.
- Confidentiality and digital trust: If a digital business effort loses “trust,” it could lose everything. Did the company formerly known as Facebook inspire “trust”? Apple? Does Amazon? Each company must take this into account and also align with accepted practices around the world, which are not always the same.
- Security of objects: More and more devices are becoming “software compatible”. The car is one of the more recent examples, and many automakers are looking to benefit from subscription revenue. Anytime another device is connected to the internet, it is another point of data collection and transmission, and it must be secure.
October 2021 was a strong month
As WisdomTree considers the cybersecurity space, it’s clear that October 2021 was a month when many of these specific companies erupted positively in terms of stock price performance.
Quarter to date, On WisdomTree Cyber ââSecurity Fund (WCBR) is one of WisdomTree’s top performing strategies – it returned 17.4%, outperforming benchmarks in growth, technology and cybersecurity, Nasdaq 100 Index (11.3%), S&P 500 Information Technology Index (+ 12.5%), Nasdaq CTA Cyber ââSecurity Index (+ 14.4%) and NYSE FactSet Global Cyber ââSecurity Index (+ 12.1%).3
The performances are historical and do not guarantee the future results. Actual performance may be lower or higher than stated. Investment returns and the principal value of an investment fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. The most recent holdings and standardized performance data for the quarter and month-end are available at https://www.wisdomtree.com/etfs/megatrends/wcbr.
WisdomTree shares are bought and sold at market price (not at NAV) and are not individually redeemed by the Fund. Total returns are calculated using the daily net asset value (NAV) at 4:00 PM EST. Market price returns reflect the midpoint of the bid / ask spread at the close of trading on the exchange where the Fund’s shares are listed. Market price returns do not represent the returns you would get if you had traded stocks at other times.
The main topics covered were âSmarter Securityâ, âCloud Securityâ, âPerimeter-less Worldâ and âObject Securityâ. Team8 updates its take on individual cybersecurity companies on a semi-annual basis, and one of the more interesting considerations is what themes will evolve into larger exhibitions.
We always remind investors that with the potential for disproportionate growth and disproportionate returns comes the possibility of higher risk. Focusing on the future usually means smaller or newer businesses. However, we keep coming back to the fact that, thinking rationally, cybersecurity should be one of the biggest considerations for any business, in the world, in 2021. It’s just a matter of which departments or businesses are doing. will seize this market.
1 Source: Robert McMillan and Dustin Volz, âSolarWinds Hackers Continue to Hit Tech Firms, Microsoft Says,â The Wall Street Journal, 10/25/21.
2 Source: Dustin Volz, âBiden Administration Orders Federal Agencies to Correct Hundreds of Cyber ââDefects,â The Wall Street Journal, 3/11/21.
3 Source: Tree of Wisdom. WCBR performance at net asset value. Performances for the period from 09/30/21 to 11/08/21. You cannot invest directly in an index.
Initially published by WisdomTree on November 18, 2021.
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Significant risks associated with this article
There are risks associated with investing, including possible loss of capital. The Fund invests in cybersecurity companies, which generate a significant portion of their income from security protocols that prevent intrusions and attacks against systems, networks, applications, computers and mobile devices. Cyber ââsecurity companies are particularly vulnerable to rapid technological change, rapid obsolescence of products and services, loss of patent, copyright and trademark protection, government regulation and competition, both both nationally and internationally. The stocks of cybersecurity companies, especially those related to the internet, have experienced extreme price and volume swings in the past that have often not been linked to their operational performance. These companies can also be smaller, less experienced companies, with limited product or service lines, markets or financial resources, and fewer experienced management or marketing staff. The Fund invests in the securities included in, or representative of, its Index regardless of their investment merit and the Fund does not attempt to outperform its Index or take defensive positions in declining markets. The composition of the Index is highly dependent on quantitative and qualitative information and data from one or more third parties, and the Index may not perform as expected. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.