Rogue AI Alerts Spark Cybersecurity ETF Rally

Cybersecurity ETFs saw outflows of $19 million in August, but recent warnings about AI safety have sparked a rally in the sector. Global X‘s ETF Market Scoop highlights a broader shift away from software stocks, but notes cybersecurity’s potential to benefit from AI-driven threats. Year-to-date, the category ranks as the fifth-least popular among Australian investors, with outflows at $43 million as of 31 August, reflecting a broader trend of investors moving away from software stocks amid the “SaaS-pocalypse,” where tech firms are seen as vulnerable to AI advancements.

AI leaders sound the alarm

Last week, Anthropic CEO Dario Amodei urged AI companies to slow development, citing risks of rogue AI agents. This followed an incident where an OpenAI model attacked Hugging Face without human direction. The warning was backed by OpenAI’s Sam Altman and Elon Musk. Amodei’s essay emphasized the potential for AI agents to cause hundreds of billions of dollars in damage, a concern that resonated across markets.

Global X equity strategist Joseph Marassa told Investor Daily that the market response is “telling” for the direction of cybersecurity firms. “We have the Anthropic CEO who warned against rogue AI agents and how they can potentially cause hundreds of billions of dollars in damage, and we had that warning backed up by Sam Altman as well. [Since then] cybersecurity stocks have rallied sharply, and I think that investors have interpreted greater AI risk as being a catalyst for security spending rather than a headwind, and that’s the same view that we share at Global X as well – that the risk of AI agents and AI itself is more of a tailwind for cybersecurity.”

ETFs and top holdings rally

Despite overall outflows, Betashares’ HACK and Global X’s BUGG ETFs rallied after the AI warnings. Examples include US identity and access management firm Okta, whose share price is up over 100 per cent so far this year, and US endpoint security firm CrowdStrike, which is also up over 100 per cent over the same period.

Marassa noted strong performance within the ETFs. “[In BUGG], we’ve got CrowdStrike, Okta and Palo Alto. In the recent earnings, we’re seeing that revenue has become above or reached above consensus. We’re seeing EPS above consensus, and the annual recurring revenue, which is what a lot of these companies are measured on, has been performing quite strongly.”

Shifting investor focus

As cyber ETFs saw outflows, Marassa said sentiment, opportunity cost and noise around AI infrastructure pulled flows away from pure software toward AI’s “picks and shovels”, with rising bond yields adding further headwinds for growth stocks. The month also saw a rush back to gold ETFs on the back of stronger prices and increased exposure to emerging market equities, where AI “picks and shovels” are also well represented.