An ETF Poised for Growth No Matter What Happens to the Economy

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I am sure you don’t need me to tell you, but even after a strong 10% bounce in the second half of last week, 2022 has not been a good year so far for stocks in general. As of Friday’s close, the S&P 500 is down 16.75% Year to Date (YTD), and things have been even worse in some areas. Growth stocks, those with high P/Es, where their value is predicated on potential future earnings, for example, have underperformed.

In some ways that makes perfect sense, but in another it is crazy. The crazy aspect points to a major opportunity in an industry that looks destined to grow in leaps and bounds over the next few years, no matter what the inflation rate turns out to be, or what ends up being the Fed’s actual terminal rate.

The big drop makes sense because the selloff has been about the threat of worsening economic conditions and even a recession and, logically enough, growth stocks are less attractive in an environment where economic growth is predicted to turn negative over the next few quarters. The thing is, though, there are some industries where a few quarters of contraction of GDP and even a rise in the unemployment rate will cause no more than a blip in their growth trajectory.

Some of those industries seem obvious, but they still involve some risks. I have written before about EVs and alternative energy in that vein and, while I believe that both offer the kinds of opportunities I am talking about here, it is possible that, ten years from now, some new technology will have emerged that shakes them up. If, say, fuel cell technology advances in such a way as to enable cheaper, less clunky power delivery, hydrogen driven vehicles and even power plants that use water as their fuel source could dominate in a decade.

There is one area, though, where growth seems inevitable and yet there is no obvious technological threat to growth: Internet security. The technology of how we make computers and the internet more secure could, in fact almost certainly will, change in the coming years. However, that will serve to grow the industry, not threaten it existentially in the way that improving technology in other areas could threaten EV companies. Maybe that is why most studies expect the industry to double in size over the next six or seven years. Whatever the reason, though, that is the consensus view. For long-term investors, that makes internet security a “must-have” in their portfolios.

Usually, when I reach a conclusion like that, I go looking for the best individual stocks to play the long-term trend. I favor well-managed companies that have shown the ability to operate profitably and ones that have a technology pipeline that offers some futureproofing, and I usually limit myself to two or three selections so as not to overly dilute my investment. With internet security, though, that isn’t the best approach. Even though there probably won’t be technological advances that threaten the industry, there will be some that are company-specific, so picking individual winners is difficult.

Companies like Palo Alto Networks (PANW) and CrowdStrike (CRWD) dominate the space now, but rapid growth is usually accompanied by the emergence of a few new companies with new technologies and, should that be the case here, I would want to own them. This is therefore a time when an ETF, with broad industry exposure and the ability to incorporate upstarts that disrupt in the future, is a better bet than individual stocks.

There are several options out there, but my choice would be the Global X Cybersecurity ETF (BUG). BUG gets the coveted Morningstar 5-star rating, marking it as one of the best in its class, has good liquidity, and around 70% exposure to the U.S. The latter is important because while you want some international influence, the American government and corporations have both the will and the money to drive cybersecurity forward, so it is likely to be the center of growth in the industry for some time.

Buying something like BUG isn’t a trade, it is an investment. It assumes that there will be long-term growth in the industry, so the ideal time to buy in is when short-term factors have put pressure on the price. That is where we are now. Even if the Fed gets this part of the cycle as wrong as it did the last, the damage will be temporary, and there is always a chance that they may get it right this time and avoid a full-blown recession. Whatever happens, though, spending on cybersecurity will soar because it has to, and the broad exposure offered by BUG is a good way to position for that.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.



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