Cybersecurity ETF Could Be Bet on Industry Consolidation | ETF Trends

Russia’s ongoing war against Ukraine is one reason that cybersecurity stocks and exchange traded funds are in the spotlight this year, but it’s not the only one.

Geopolitical conflict is a catalyst for generating cybersecurity headlines, but there’s more to the story, and that could be a positive for ETFs such as the First Trust Nasdaq Cybersecurity ETF (CIBR). CIBR, which tracks the Nasdaq CTA Cybersecurity Index, is the largest and oldest fund in this category.

Another catalyst for investors to consider when evaluating CIBR is cybersecurity mergers and acquisitions, which experts are forecasting will remain brisk.

“Cybersecurity M&A will likely remain hot, even as investor interest in tech more broadly continues to cool,” according to S&P Global Market Intelligence. “Investors in recent years have piled into cybersecurity, paying high valuations for equity stakes in a range of companies that have yet to produce a profit. That thesis expanded into M&A, where both strategic and financial investors struck deals at record paces and prices throughout the pandemic and into 2022.”

The $5.32 billion CIBR, which turns seven years old next month, is home to 41 stocks. The median market value of the fund’s components is $6.62 billion, according to issuer data. That’s a sign that some CIBR member firms could be credible takeover candidates going forward.

Additionally, the industry’s fundamentals are sound, and the reasoning for elevated consolidation is clear, potentially providing a runway for more takeover activity.

“The fundamentals that underpin cybersecurity’s market-beating transaction valuations are still very much in place, largely unaffected by the macroeconomic concerns weighing on other sectors. M&A in the sector should continue at a steady and expensive clip, even as the stock market shifts, analysts said,” noted S&P Global.

Some CIBR components, particularly larger fare, are sitting on substantial cash stockpiles. With tech stocks faltering this year, some larger cybersecurity companies could be compelled to make deals due to more attractive valuations.

“Meanwhile, cybersecurity M&A volumes and valuations have held strong. Acquirers signed 48 deals in the first quarter. At that rate, full-year volumes will edge above 2021, a record year for sector deals,” added S&P Global. “Not only are cybersecurity targets proliferating, but the types of buyers acquiring cybersecurity companies are also growing. Certain cybersecurity companies have acted as consolidators, buying smaller companies to build more comprehensive product portfolios.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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