The Global X Cybersecurity ETF (NASDAQ:BUG) was down slightly during the session that followed the massive global CrowdStrike (CRWD) content update botch last week. CRWD was lower again in early trading on Monday, but the remainder of the cybersecurity industry was up slightly. This is why it pays to have some diversification, even as there is a powerful groundswell of bullish sentiment with the world’s largest cybersecurity company.
I have a hold rating on BUG, though. I continue to see neutral performance trends, while there is certainly a fundamental and secular bullish backdrop for the demand for data security and corporate investment into digital safety. After downgrading a competing ETF – the First Trust NASDAQ Cybersecurity ETF (CIBR) from a buy to a hold back in the first quarter – I see similar risks with BUG today. Its technical chart is constructive, though.
CrowdStrike Shares Fall Back Under $300
According to the issuer, BUG invests in stocks of companies operating across the development and management of security protocols preventing intrusion and attacks to systems, networks, applications, computers, and mobile devices, collectively, cybersecurity companies, and information technology sectors. The ETF allocates capital across traditional sectors and geographic areas, too.
BUG is a relatively small ETF with total assets under management of $783 million, sharply lower compared to CIBR’s AUM north of $6 billion as of July 19, 2024. BUG’s annual expense ratio is middle of the road at 0.50% while its trailing 12-month dividend yield is just 0.11%. Share-price momentum is also lackluster, though slightly better than it was three months ago. I will point out why the technical situation is actually not too bad today later in the article.
Still, BUG is risky in the sense that while its portfolio is about equally weighted, it holds just 24 securities, so firm-specific events, as we saw with CRWD last week, can have a material impact on the ETF’s short-term performance. Liquidity is a strong point, however, given BUG’s low average volume of less than 200,000 shares and a median 30-day bid/ask spread of 14 basis points, per Global X.
Looking closer at the allocation, the 3-star, Bronze-rated ETF by Morningstar has significant small-cap and growth exposure – areas that depend on high corporate enterprise spending given the tech sector weighting. The valuation of 29 times earnings is no bargain either, though its long-term EPS growth rate is high at 15%, yielding a PEG ratio of just under two, which is not too extended compared to the broader market.
BUG: Portfolio & Factor Profiles
Cybersecurity investors often know what they are getting into. The portfolio is 100% invested in the Information Technology sector, while BUG’s top 10 positions comprise more than half of the fund, which is a high amount. As of last Thursday, CrowdStrike was the second-largest position.
BUG: A Portfolio of Just 24 I.T.-Sector Securities
When it comes to seasonality, BUG’s limited life makes spotting trends challenging. So, I took a look at CIBR which began trading back in 2015. Historically, August has been a strong month, but volatility has come about in September, with share-price losses extending into early October. Thus, there could be a bit more upside if the calendar is any guide.
CIBR Seasonality: Bullish August, Weaker Late Q3-Early Q4
The Technical Take
BUG and CIBR have performed very similarly in the past year. For BUG, there are encouraging trends. Notice in the chart below that the ETF continues to hold its rising long-term 200-day moving average, suggesting that the bulls control the primary trend. The RSI momentum oscillator is also moving up after touching oversold conditions back in the second quarter.
What I also like is that there was a longer-term breakout in December 2023. The bears had sold BUG on a few occasions when the fund rallied toward the $25 to $26 zone. A 30%-plus surge into the end of last year was powerful, but BUG has merely consolidated in the last eight months, a key facet of my hold rating. I’d like to see the ETF rally above its February multi-year high of $31.78 to help confirm the next leg of its bull market.
Overall, support is in the $27 to $28 area, while resistance is just under $32.
BUG: A Rising 200dma, Holding Above Long-Term Support
The Bottom Line
I have a hold rating on BUG. CrowdStrike’s mishap last week notwithstanding, the broader group has some secular tailwinds. But with a valuation that is by no means cheap and a mixed chart, a neutral stance in the cybersecurity space still makes sense today as the dust settles around CRWD.
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