Exclusive Interview: Pedro Palandrani, Director of Research at Global X ETFs

Learn How Artificial Intelligence and Machine Learning Are Preventing Cyber Attacks

Ric Edelman: One of the most exciting elements of technological innovation is the Internet. And one of the scariest elements of technological innovation is cybersecurity. So I'm happy to bring on to the program Pedro Palandrani. He is director of research at Global X ETFs. Pedro, thanks for joining us.

Pedro Palandrani: Thanks for having me, Ric.

Ric: You know, we're seeing, as you know, more headlines than ever about hacking and cybersecurity. Is this just something we're going to have to tolerate?

Pedro: Cybersecurity is essentially going from a 'nice to have' to an essential technology not only for companies, but for governments and for consumers as well. This is essentially because tech has expanded dramatically over the last 10, 15 years. We moved from data centers, for example, to a very diversified base of end devices like smartphones, laptops and even technologies like cloud computing, software service, IoT, you name it, right? So that's making it a lot harder for companies to control access to control data and infrastructure. Cyber attacks are becoming more sophisticated than ever, and because of that, our governments are paying attention to cybersecurity more than ever. And all of this is just translating into greater spending on cybersecurity.

Ric: In the old days, those hackers were just kids playing around. But these days, these cyber hackers are rogue nations, enemies of the United States.

Pedro: You have organized criminal organizations, countries where you're seeing some cyber attacks. And this is especially in the context of geopolitical tensions. So cybersecurity solutions also need to scale. Instead of fighting one of these fights with knives and facing like a gunfight, we now need to arm cybersecurity solutions and companies with AI and ML solutions, for example, that are going to be able to be at the same level of the cyber attacks that we're seeing around the world.

Ric: So it seems like this is a never-ending battle. You know, the good guy builds a 10-foot wall, and the bad guy shows up with a 12-foot ladder.

Pedro: Unfortunately, that's somehow a reality, right? There are always not only newer technologies that are allowing the cyber attackers to perform one of these hacks, but at the same time, there are more and more entry points than ever. So as you think about newer technologies in the next five, 10, 15 years, such as autonomous vehicles, robotic surgery, medical devices, all of these are going to be connected to the Internet. And so, unfortunately, that's going to be a new entry point for cyber attackers to go after. And this is essentially going to create greater needs, greater demand for cybersecurity solutions. So for us as investors, that's actually good news, right? Because we know that the longevity of the cybersecurity theme is going to be there. So all of these tailwinds are going to be very important for the cybersecurity theme just going forward.

Ric: What is the current state of technology in cybersecurity? Are we losing ground? Or are we holding our own? Where does it stand?

The Rise of Zero Trust Networks

Pedro: I think we're definitely gaining ground. You know, a lot of these companies are coming up with very strong technologies. That's important because the attacker can succeed once and that's already enough for them. But the defenders need to succeed essentially 100% of the time. So it's a very uneven playing field. So that's why technologies such as AI and ML are starting to become increasingly important for companies and organizations around the world. Another tech development that we're seeing from companies, for example - Zero Trust networks. So Zero Trust essentially provides users with access to internal apps, but without the need to connect to the company's network or expose the user to the Internet. And this is very important because that architecture allows the user or the hacker actually not to move horizontally throughout the network. So we're seeing a lot of new technological developments in the cybersecurity theme companies that are trying to protect the network, companies that are trying to protect the cloud messaging identity. And there are so many different verticals within cybersecurity where we're seeing many companies trying to come out with new technologies.

Ric: You know, I've heard the joke that there are two kinds of companies, those that have been hacked and those who don't know they've been hacked. And so clearly, cybersecurity has to be a growth industry. So what would you say are the investment opportunities? How can we, I mean I hate to put it in this context, Pedro, but if we're going to have to suffer with the issues of hacking and security threats, we might as well figure out a way to make money at it. So what are the investment opportunities?

Pedro: Exactly. And again, I think this is a theme with a lot of longevity. On a macro level, these business models are extremely attractive because most of these companies are software as a service companies. So they have great retention rates, they have great profitability in most cases. So that's a very attractive investment opportunity. Here at Global X, we have the Global X cybersecurity ETF ticker BUG or bug. One of my favorites, this ETF right now has over $1.2 billion in assets under management, and it really tries to provide exposure to cybersecurity companies. This is a pure play focus on cybersecurity and one way to access that universe of companies that are not only protecting the network or the cloud, but these are also really all the companies that are trying to come out with great solutions for the theme that we just discussed today.

Ric: Jean and I are big fans of BUG. We own that fund as part of our diversified portfolio in technology. The cybersecurity ETF from Global X, the symbol is BUG, bug. I agree with you. It's a really strong play there. You had mentioned AI and ML - artificial intelligence and machine learning. How big a role do these technologies play in cybersecurity and within the Global X ETF?

Pedro: Again, it's one of the technologies that we're starting to see a lot of the companies developing internally, right? You can even think like a company like Google with Gmail that tries to protect all of your messaging capabilities. Gmail is essentially trying to protect you from opening up an email that could be a scam. And these scams and phishing attempts are getting a lot of sophistication. So AI and ML is increasingly becoming important for companies. Google actually just acquired Mandiant, one of the companies that we had within our BUG ETF. And M&A activity is one of the trends that we're seeing in cybersecurity. I know, Ric, you're an expert in crypto and digital assets. Generally speaking, even companies like Coinbase, for example, acquire a cybersecurity company. Earlier this year. We're seeing a lot of these large companies starting to acquire cybersecurity solutions because they need to provide cybersecurity solutions to their clients, to their customers. And it's the large tech companies, the new entrants, the emerging technologies are trying to come up with strong solutions to protect their data, to protect their users and pretty much their entire infrastructure stack.

Cyber Security Mergers and Acquisitions Gaining Ground

Ric: And I was going to ask you about the M&A activity because I've noticed the same thing, that there's a lot of M&A going on and that's not true for the rest of Wall Street. M&A activity is generally down this year because of the market volatility and lower valuations, but in the cybersecurity space, there's a lot of activity. What message should investors take from the fact that companies are engaging in buying other companies in the cyber field?

Pedro: You're right, Ric, a lot of M&A activity. And so we would expect that to continue to be the case, at least within the next 12 to 24 months. Just for context, typically cybersecurity providers specialized in a limited amount of product types, right? So whether that's endpoint security or network security or identity security, the trend that we've strictly seen is that companies are targeting niche markets. If we think about it, that's forcing companies to secure their data using a patchwork of different branded services. So for customers, that's not ideal, both from a cost standpoint, but also to avoid inefficiencies when essentially seeking to protect their data users and all of the information that we just talked about. So that's really creating this new trend of M&A within the cybersecurity theme, where a lot of companies are just trying to combine their solutions to really bring to market very solid and strong cybersecurity solutions. So for us as investors, that's great. You are seeing a lot of premiums being paid for these cybersecurity companies and we can try to benefit from M&A activity in this space.

Ric: In other words, you buy the companies today, wait for them to get acquired, which happens at a premium. So yeah, it's a wonderful investment strategy for this space. I have found it really interesting that in the old days when you were trying to choose a company you wanted to do business with, you evaluated that decision based on the company's products and services, the price, the customer service and so on. But today, increasingly, we're forced to ask about their cybersecurity policy. We're forced to ask, how safe am I to be working with you? Because if I'm going to connect my bank account to you, if I'm going to share with you my Social Security number or other personal information, I need to know that you're going to treat that data with a high degree of security. And so companies are forced to spend a lot of time paying attention to cybersecurity in a way that 10, 15, 20 years ago, they never really had to do this. This is why I'm convinced that cybersecurity is one of the biggest growth areas for investing opportunities and why Jean and I own the Global X Cybersecurity ETF. The symbol is BUG, bug, as part of our diversified portfolio. So I strongly encourage you to take a serious look at this Global X ETF. You can learn more about it at GlobalXETFs.com or by asking your financial advisor about Global X and the symbol is BUG, bug. That's Pedro Palandrani. He is director of research at Global ETFs. Pedro, thank you so much for joining us on the show today.

Pedro: Thank you, Ric.