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Expect cybersecurity sector to benefit as threats increase

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Not a week goes by without at least one major item of news of cyberattacks, software ransom attacks or data theft. With each step that software developers take there seems to be a matching, if not stronger, response from hackers.

Just this week cybersecurity AI firm Darktrace LON:DARK reported that novel social engineering attacks, or simply put, email cyber scams, have increased by 135% since the AI chatbot ChatGPT came into widespread use.

Most companies are beginning to take this seriously and invest in protecting their data and networks from future attacks and the spend on cybersecurity is rising. The Nasdaq CTA Cybersecurity Index reflects some of this growing trend, with an 8.5% increase since the start of the year to 2,009, and an increase of 72% over the last five years.


Covid years a game changer

Just to get a sense of the size of the problem, this year spending on cybersecurity is expected to reach around $151 billion and to rise by between 11% and 12% per year going forward, according to NASDAQ. But the index provider’s estimate may prove conservative given that the cyber onslaught has intensified since the start of Covid.

Of the hacker groups observed in 2021, almost 80% were new ones, not previously active. Of the malware that came into play that year 40% has never been seen previously. Importantly, the intensity of attacks has not abated with the receding of Covid.

Cybersecurity software that is currently commercially available does not match the needs of the users and this gap is creating demand that could rise to over $10 trillion, or ten times what is currently being sold, in the space of just two to three years, according to research by McKinsey. This goes across all the IT segments: data protection, email security, cloud and network security, application security, governance risk and compliance.

That is even before taking into account the fact that the IT industry is on the verge of entering a completely new playing field with quantum computing and a completely new way of programming which will be needed for massive global projects such as automated driving.

Europe, the US and China are all independently working on their own development and once these kinds of projects are in place cybersecurity needs will increase multifold.

McKinsey’s research found that the segments that are currently best understood (although still woefully under protected) are data protection; governance, risk and compliance; and identity and access management. For instance, those sectors where problems make the most headlines, such as identity theft, data protection, and secure banking, are relatively better catered for in terms of solutions than others that are more “technical” and where the software industry actually needs to protect itself, rather than end customers.

There are some areas of cybersecurity where the availability of software is only about 1-5% compared with the size of the market, such as cloud security, general web security, Internet of Things (IoT), operational and application security.

These gaps will fuel demand for cybersecurity packages, specifically in the area of cloud transformation, AI and machine learning, with increased need for full-service offerings that can cover a company’s end-to-end operations.

Here’s a selection of related ETF ideas

Product Name Exchange Ticker Listing Currency
WisdomTree Cybersecurity
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
CYSE USD
WisdomTree Cloud Computing
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
KLWD GBP
WisdomTree Artificial Intelligence
Hargreaves Lansdown | Interactive Investor AJ Bell Youinvest | Charles Stanley Direct | EQi
INTL GBP

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This article does not constitute investment advice. Make sure you do your own research or consult a professional advisor.

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