IHAK ETF: Cybersecurity And Cloud Security Headed For Strong Growth (NYSEARCA:IHAK) | #hacking | #cybersecurity | #infosec | #comptia | #pentest | #ransomware

I rate IHAK a Buy. Launched by BlackRock, Inc. and managed by BlackRock Fund Advisors, iShares Cybersecurity and Tech ETF (NYSEARCA:IHAK) offers investors balanced exposure to the cybersecurity and technology sectors, featuring stocks of companies that are positioned well to capitalize on the growing cybersecurity and cloud security fields. Several stocks within the fund’s top holdings have shown strong performance in the past year, ultimately contributing to IHAK’s 12% growth in 2023. Additionally, the fund invests heavily in the cloud security sector, a sub-sector of cybersecurity that is expected to grow at a CAGR of over 22% each year through 2032.

The fund’s only tangible weakness is its low dividend yield, which may potentially deter income-seeking investors. However, its strong capital appreciation and prospective growth may compensate for this. Ultimately, IHAK should continue to have strong performance in the long term, with favorable industry growth prospects to support this.

The fund primarily invests in stocks of companies across a broad range of sectors, including information technology, cybersecurity hardware and software, and network security manufacturers. IHAK invests in growth and value stocks in both emerging and developed markets. Additionally, in order for a stock to be included in this portfolio, the company must derive at least 50% of its revenue from one of the above sectors. The fund is rebalanced twice a year and allocates its holdings using a market-cap weighted strategy.

Holding Analysis

While the fund uses a market-cap weighting strategy and not an equal-weighted approach, the top 10 holdings in its portfolio tend to be relatively equally distributed. Its top 10 holdings span from 4% to 5%, with its highest weighted holding constituting only 5.11%. Despite this, the top 10 holdings still constitute over 45% of the fund’s entire portfolio, still making this ETF highly dependent upon the performance of its top 10 holdings.

IHAK also is very heavily skewed towards technology companies, with industrials making up less than 4% of the portfolio’s stocks. Although IHAK has a main focus on United States technology companies, the fund still invests in several countries globally, leaving less than 20% for companies in Japan, Taiwan, Canada, Germany, Denmark, United Kingdom, Malaysia, and South Korea.

Strengths

IHAK’s portfolio, or at least its top 10 holdings, is full of high performers in 2023. Palo Alto Networks (PANW), Fortinet (FTNT), CrowdStrike Holdings (CRWD), Zscaler (ZS), VMware (VMW), and CyberArk Software (CYBR) report growth of 66%, 41%, 46%, 42%, 12%, and 19%, respectively, in 2023. These 6 stocks also represent nearly 30% of the fund’s portfolio, which likely accounts for IHAK’s growth in 2023 as well. IHAK is up over 12% YTD. These companies are market leaders in the cybersecurity space, all of which continue to have “Strong Buy” recommendations from both Seeking Alpha Analyst and Quant ratings.

Furthermore, Seeking Alpha gives IHAK relatively high quant ratings for its momentum. At above 7% for both 1 month and 6 month total return, IHAK significantly outperforms the median of all ETFs, at 1.33% and 3.22%.

Growing cybersecurity and cloud security industries

Alongside the strong performance of IHAK and its top portfolio companies, the cybersecurity industry is also projected to have strong growth throughout the next five years. Cybersecurity revenue is projected to grow at a CAGR of 8.53% from 2023-2028, reaching a market volume of over 103 billion by 2028.

Many of IHAK’s top holdings include cloud security cybersecurity companies, including Palo Alto Networks, Zscaler, and Trend Micro. Cloud security is essential in ensuring user and device authentication and data privacy protection, ultimately protecting cloud data from cyber threats. Cloud security is one of the most prominent sectors within cybersecurity and was worth over $20 billion in 2022. Similar to the growth of the overall cybersecurity industry, the cloud security market is also expected to have strong growth throughout the next decade. The industry is expected to exceed $148 billion by 2032, growing at a CAGR of 22.5% each year.

Low dividends

While I was unable to find many weaknesses associated with IHAK, the fund’s low dividends is one drawback that stands out to me. Seeking Alpha gives IHAK a dividend grade of F, along with an F grade for each underlying metric seen in the table below. The fund has a surprisingly low dividend yield of 0.04%, which is substantially lower than the median of all ETFs at 1.69%. What strikes me most about the fund’s dividends is its Dividend Growth Rate. The fund has an alarming TTM growth rate of -94% and a 3 year CAGR of -63%. Despite this, the fund somewhat compensates for this poor dividend yield with relatively strong capital appreciation. The fund is up nearly 25% in its total return rate with a 3-year outlook. The fund currently pays out an annual dividend of $0.01. However, this is its lowest point and only has room to grow in the future.

Threats

As the cybersecurity industry continues to advance and deploy new solutions and technologies, these new developments ultimately come with new security risks. Just as cybersecurity continues to expand, cybercrime is also growing at the same rate. In 2022, cyberattacks rose over 38% from 2021. Moreover, cloud third-party threats represent one of the most prominent threats to IHAK since the fund has a large focus on the cloud security sector. In 2020, cloud security breaches constituted 79% of all cyberattacks. In the last two years, this number had risen to 98%. As shown in the graph above by Statista, Cyber Solutions seems to be growing at a much faster rate than Security Services. Ultimately, cybersecurity firms must continue to innovate and stay one step ahead of cyber criminals. In conjunction with developing new solutions, they also need to equally address risk, especially those that relate to cloud security.

Conclusion

IHAK has demonstrated strong growth in the past year, with its top portfolio companies performing especially strongly. The fund also focuses heavily on cloud security companies within cybersecurity that also has favorable future growth projections.

With that being said, I rate IHAK a Buy. The only real weakness I see associated with the fund is its low dividend yield and its decreasing yield throughout the years. However, I believe that investors are more focused on long-run growth and capital appreciation and less on income-generating dividends when investing in the cybersecurity space. Moreover, to mitigate risks associated with cyberattacks, cybersecurity companies will need to place a greater emphasis on risk prevention and preparedness.