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Investing in the biggest security story of our time
Cyber security: Investing in the biggest security story of our time. Cyber security has become a top priority for companies and governments worldwide and it’s easy to see why: the move to digital means that businesses have a greater reliance than ever on the internet for a huge array of functions. And can be seen from the almost daily reports of security breaches and high profile attacks, no individuals, businesses or even governments are safe. In the last year alone, we have witnessed cyber attacks on organisations of every kind, from US political parties to UK mobile phone operators.
Senior executives, rather than back-office IT teams, now have ultimate responsibility for protecting networks, data and internet-enabled devices. As a result, cyber security has become big business: an estimated $1 trillion globally will be spent on cyber security products and services between 2017 and 2021. The risk of cyber attacks has also been heightened by the growing number of internet-connected devices globally. It is expected that 200 billion smart devices will be in use by 2020.
With cyber security now a megatrend, how can investors access this growing sector?
What is cyber security?
First and foremost, the cyber security industry is not a single discipline – it involves the expertise of companies in a range of sectors, including software development, communications equipment, advisory firms and aerospace and defence companies. There is no single way companies can keep their networks, devices and data secure: training staff to look out for bogus emails is as important as keeping software up to date and encrypting the most sensitive data.
The overall goal of cyber security is to protect computer networks, programs, connected devices such as desktop computers and smartphones, and the data they hold, from unauthorised access and theft. This could be a deliberate and/or malicious attack by a cyber criminal looking to steal data to sell, a hacker looking to cause mischief or a business rival or nation state looking for sensitive information. It could also be an innocent mistake; 17.7 per cent of data breaches were caused by unintentional actions or errors, according to 2016 research by Verizon.
The cyber threat is real – and companies are spending money to tackle it
One of the unique aspects of cyber security is that cyber threats are constantly evolving: as systems and devices evolve, would-be attackers are developing loopholes to exploit them. The number of cyber threats affecting businesses reached an all-time high in 2016, including a 752 per cent jump in the varieties of ransomware seen by security experts, according to Trend Micro research.
High-profile cyber attacks are illustrative of the potential damage cyber attacks can have on a company’s reputation, revenue and future growth prospects. Yahoo last year disclosed two breaches, one affecting more than 1 billion accounts and the second around 500 million users.5 These breaches resulted in US criminal charges and caused Verizon to abandon its takeover bid of Yahoo for $350 million. In the UK, internet service provider TalkTalk had to pay a record £400,000 fine after the personal details of 150,000 customers were accessed by a cyber-attack. In the political sphere, it is alleged that Russian hackers targeted senior Democratic party figures as part of efforts to influence the outcome of last year’s US presidential election.
IDC forecasts a compound annual growth rate (CAGR) of 8.3 per cent for the cyber security industry, more than twice the rate of overall IT spending growth, between 2016 and 20207. Within cyber security, the largest areas of growth will be mobile security, Internet of Things (IoT) security, and specialised threat analysis and protection, according to Bloomberg and IDC.
How can investors access the cyber security megatrend?
Cyber security, and the organisations and products that companies use to combat the threat, will become increasingly important: regulatory requirements on data protection and privacy are set to increase, and the expansion of the Internet of Things means more objects, from phones to fridges, will have an internet connection and produce data that will need to be secured.
Governments are also making it a priority: Philip Hammond, UK Chancellor of the Exchequer, has set up the National Cyber Security Strategy, underpinned by a £1.9 billion investment, and President Trump in the US is expected to sign an executive order on cyber security in the spring.
All these elements mean businesses are likely to allocate bigger budgets to cyber security. However it is too early in the life of the cyber security megatrend to clearly identify any winners: there are many competing technologies addressing the ever-evolving threat, including the work of start-ups that haven’t yet secured patents. These smaller companies are offering innovative technologies and products, and venture capital firms invested around $8 billion in cyber security companies between 2014 and 2016. Additionally, trying to pick individual stocks among companies at such an early stage exposes investors to a higher degree of volatility than they may wish to take on.
Investment exposure to the cyber security industry therefore requires a passive approach. A global and diversified exposure can give investors access to all the elements spurring growth of the cyber security space. Typically, smaller and midcap companies have been offering the most innovative technologies and products, and so any exposure should ideally capture these players. Finally, in order to remain true to the theme, an equal-weight portfolio ensures end-to-end exposure to the whole ecosystem of companies and provides exposure to the companies that will be tomorrow’s winners.
For more information, visit etfsecurities.com/cyber
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The impact of US tariffs continues to dominate market sentiment and risk assets, including crypto, struggled with this uncertainty throughout the month. The Nasdaq Crypto Index™ (NCI™) fell 4.46% in March as the S&P 500 and Nasdaq 100 dropped 5.63% and 7.61%, respectively.
Despite the macro uncertainty from Washington, US policymakers are continuing to embrace crypto in an unprecedented way, including launching a Bitcoin Strategic Reserve, Digital Asset Stockpile, and engaging in expansive work at the regulatory agencies and in Congress.
Our team spent the last week of the month in Washington, meeting with regulators to share our experiences and views on what’s most important for crypto investors in the US. In his latest Notes from the CIO, Samir Kerbage shares what he learned from these meetings and how investors should be thinking about the new regulatory regime in the US.
As always, we are greatly appreciative of your trust in us and are here to answer any questions you may have.
-Your Partners at Hashdex
Market Review
March was marked by the tariff dispute triggered by the Trump administration. Back-and-forth fiscal policies, threats, and retaliations dominated the month’s agenda. The uncertain macroeconomic environment put investors into a defensive stance and negatively impacted crypto assets. The Nasdaq Crypto Index™ (NCI™) closed the month down -4.46% after a period of high volatility. Major market indices, the S&P 500 and Nasdaq-100, also recorded steep declines of -5.63% and -7.61%, respectively. These concurrent drawdowns across equities and crypto underscored March’s broad market caution, as trade war uncertainty prompted investors to flee risk assets.
During times of uncertainty, it is common to observe increased correlation among different classes of risk assets. This pattern played out in March: the 6-month rolling correlation of monthly returns between the NCI™ and the Nasdaq-100 surged to roughly 0.91 (see chart below), its highest level since 2021, indicating that crypto assets were moving almost in lockstep with tech stocks. This spike in correlation confirms that crypto was behaving like a high-beta extension of the tech sector—an amplified version of the Nasdaq-100. The lack of clarity in the global landscape leads investors to reduce their risk exposure and seek protection, a movement known in financial markets as “risk-off” allocation.
6-Month Rolling Correlation of Monthly Returns between the Nasdaq Crypto Index and Nasdaq-100 (Apr 2021–Apr 2025).
The chart illustrates how this correlation has been increasing since the American elections in November 2024 and spiked to approximately 0.91 in the most recent period—a multi-year high. This visual evidence reinforces the view that crypto assets have been moving closely in tandem with tech stocks, effectively acting as a high-beta version of the Nasdaq-100 during the March risk-off phase.
Following this trend, risk reduction was evident within the crypto asset class. Among the NCI’s constituents, Bitcoin (BTC) posted a decline of -1.93%, withstanding the downturn far better than other constituents such as Ether (ETH, -17.4%) and Litecoin (LTC, -34.6%). BTC’s relatively mild drop in this sell-off aligns with the idea that it increasingly trades like a high-beta proxy for large-cap tech. It still declined, but less severely, whereas smaller-cap crypto assets behaved more like speculative growth stocks and suffered outsized losses. The only exception to the negative results was Cardano (ADA), which surprised with a positive return of 3.88% despite no significant protocol developments during the month.
Thematic indices also faced a challenging environment. As highlighted in previous letters, smaller capitalization assets tend to suffer more during periods of market stress, mirroring how speculative small-cap stocks are hit hardest in equity sell-offs. The biggest negative highlight was the Digital Culture Index, which dropped -17.45%, followed by the Decentralized Finance (DeFi) and Smart Contract Platform (Web3) indices, which fell -16.73% and -12.07%, respectively. The Vinter Hashdex Risk Parity Momentum Index recorded a negative result of -8.26% but outperformed the three other thematic indices, benefiting from its high allocation in BTC and TRX (which gained 4.68%). The heavy weighting in BTC – the more resilient large-cap crypto – helped cushion this index, underscoring the relevance of the momentum factor in a well-diversified strategy during times of market stress.
The market remains on the lookout for the outcome of the fiscal policy discussions, hoping for a reduction in uncertainties and an end to the tariff war. That would likely mark the moment when investors regain their appetite for risk assets, including crypto assets. The U.S. government has also signaled interest in advancing the crypto agenda, a development that could drive the asset class to a new level of adoption. We remain confident in our positive outlook for the rest of the year and the long term.
Top Stories
US creates Bitcoin Strategic Reserve and Digital Asset Stockpile
The Bitcoin Reserve will be capitalized with BTC owned by the Department of Treasury, which could further increase via new budget-neutral acquisitions. The stockpile will also include assets owned by the Treasury. This marks a major milestone, with the US government starting to integrate major crypto assets and continues the new administration’s work to lead the global crypto economy.
Stablecoins surpass $230 billion in market value
The total stablecoins market capitalization surpassed $230 billion amid institutional demand for dollar-backed digital assets. This showcases one of the most successful applications for crypto technology enhancing traditional financial payments. It could also pave the way for new use cases that require a strong and reliable global payment system.
FDIC eases banks’ ability to engage in crypto activities
The FDIC has rescinded previous guidelines which prevented financial institutions from engaging with crypto activities without prior sign-off. By removing bureaucratic hurdles, banks may more readily over crypto-related services, potentially leading to broader adoption and integration of digital assets into the financial system.
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