Autonomous AI agents are now hacking corporate networks at machine speed, making human cyber defenses obsolete almost overnight. But as global cybersecurity spending heads towards $1 trillion to defend against these advanced threats, investors are looking beyond overhyped chatbots to the physical hardware, as well as semiconductors and security systems that shield corporate data, while joining us live to break down how to invest in AI infrastructure as well as cyber defenses.
Nate Miller, VP of product development at amplify ETFs. Hi, Nate. Great to have you on the show. Thank you so much for joining us today. So it goes without saying that there are many headlines out there regarding AI agents as well as hacks. So tell us how this actual shift to machine speed attacks is forcing companies to ramp up their security budgets and give us an idea of where those capital flows are actually heading.
Yeah. They're they're headed, uh, you know, really for the cybersecurity companies, you know, as you look across AI, you know, on the agenda side, whether that's, uh, you know, uh, Claude, uh, from anthropic or something from ChatGPT or Gemini, um, you know, regardless of those models, there are many kind of picks and shovels underneath that that win and that extends all the way from, you know, the hardware, the semiconductors, the data centers that support that to the software that needs to protect it.
So you, you know, you talked a little bit about, uh, you know, these hacks that occurred, you know, there was an event earlier this this year, early in the summer, uh, you know, some are calling it the mythos moment, where, uh, you know, a frontier model, uh, from anthropic showed that it could very quickly exploit, uh, uh, holes in, uh, software, uh, kind of de zero vulnerabilities.
But what was interesting, while there was a little bit of a knee jerk reaction and a selloff across, uh, you know, not just cybersecurity, but also the software space. What was interesting was seeing the reaction in the latest earnings from a number of these cybersecurity companies as they framed out the opportunity.
And you touched on that a little bit. You know, the trillion dollar opportunity. Now that's that's both forward looking. But there's also a tremendous opportunity to upgrade the existing AI infrastructure that's been in place for decades. Cybersecurity is not, you know, not a new theme. It's one that's been around for a while.
The Palo Alto Network CEO, you know, recently stated that, uh, you know, the the software and the systems that are in place today anywhere from 7 to 10 years old, and they can't run the latest cyber defense systems. So there's about $1 trillion opportunity to upgrade that aging infrastructure. But then looking forward, you know, things comments that the CrowdStrike CEO made, uh, that that the, uh, you know, every business is going to run on AI, and the opportunity to protect that is really the largest in the history of their company.
So we you know, we think there's a tremendous opportunity here, um, and think that, you know, playing the picks and shovels or, you know, the supporting cast and crew, um, is a great way to get exposure, uh, indirect, uh, but also exposure to the theme and its growth.
Yeah. And Nate, when we're talking about traditional investing, we hear about the importance of diversification. But let's talk about diversification within this space. So instead of betting on just a few mega cap chipmakers, some investors are spreading capital across semis hardware cloud providers.
But why do you think an equal way to bet on the entire physical backbone of A of AI is a smarter player right now than just simply riding individual tech names out there?
Yeah, tech heavy benchmarks. Uh, you know, you can. While it may show a large number of holdings, the concentration that we see, uh, you know, in some of the biggest technology names really doesn't provide the level of diversification that an investor might think they're getting out of, you know, a diversified portfolio.
If they just looked at the number of holdings, if you're concentrated, you know, 3,040% and 2 or 3 holdings, you're really not getting those benefits of diversification, nor you're going to benefit when some of those other companies are experiencing up swings. So we think an equal weighted approach, uh, one that we, uh, we use in our AI, our AVC, our, our AI, uh, ETF here at amplify provides exposure to, you know, a broad range of both hardware and software companies that are really the backbone and the underpinning of what's enabling, uh, AI over time.
And there are very many Americans out there that have subscriptions to certain plans, whether we're talking about, say, Netflix or Amazon Prime. But when we're looking at cyber security firms that generate up to 85% of their revenue from recurring subscriptions. Tell us your take on the steady utility, like cash flow that makes cyber stocks a safer defensive hedge during market volatility than traditional tech?
Yeah, we often refer to it as, uh, you know, the a utility type of allocation but within a growth oriented sector because it really is, you know, the backbone, uh, you know, of protection for a lot of these companies. Cybersecurity spending is not a discretionary line item. So year over year, the chief technology officer is going to look at his budget.
And he is not going to be cutting exposure or cutting spending on defending that company. And so, um, you know, as you mentioned, that recurring, uh, type of revenue provides a very sticky, uh, revenue base for these companies, but it also goes beyond that. You know, I think when we look at, uh, you know, really the trifecta of allocating to a theme, we would see kind of three main drivers, right?
That would be corporate spending, that would be government spending and personal spending. And I think, you know, the corporate side is is fairly easy to follow. Uh, on the defense side, you know, we include uh, in our ETF here at amplify, uh, unpack, we include some defense companies, uh, General Dynamics, for example.
And when you think about the US government needing to protect, uh, not just our physical borders, but our digital borders, right. Threats from from other nations or bad actors. Uh, there is government spending there. And I think on the personal side, you know, some individuals are probably writing a check for cybersecurity protection, but by and large, we see that often bundled in other products and services, like insurance policies where investors are getting exposure to it.
They are allocating, uh, dollars to it, albeit indirectly. But it does contribute to, you know, as I described, the trifecta of, uh, you know, thematic investing tailwinds, uh, consumer spending, corporate spending and government spending.
And I do want to expand on this. So for investors out there looking for cyber exposure, plus high income strategies that sell options against those security stocks can also generate yields. So can you walk us through how selling covered calls helps cushion downside volatility, while also at the same time allowing investors to profit from AI security demand?
Yeah. So historically, allocating to growth oriented themes has meant trading income for growth. But what we offer here at amplify we have a hack which would just be the non covered call version of cybersecurity. And we have hacky hacky which is our covered call approach. Uh, we we implement that in what we would call a yield smart approach, which means you're not just going to maximize the amount of premium that you could generate.
We're going to do it thoughtfully. We're going to try to balance some upside participation along with attractive option premiums. And this would give an investor that may want to, you know, that might be in the the distribution phase of investing, not the accumulation phase. This would give them the opportunity to allocate to a theme to generate some income.
Because these are growth oriented names. There is some volatility here, but we're offering some growth upside potential along with that. Now the premiums that we generate here targeting about 15% annually. But again we're not covering the entire portfolio. We're using options that are out of the money.
And that's delivered really nice returns this year. You know the the non covered call version hack is up close to 40%. The covered call version is up close to 30% inclusive of income. Um but it's not all been income. You know we like I said, we do have some upside there and that that premium that we generate, uh, can help buffer on the downside.
You know, if cybersecurity stocks were to experience a downturn, that premium that we collect in the covered call approach can help to offset some of those declines, providing a little bit of a buffer to investors. But I think we think it's, you know, important to offer both solutions so that regardless of somebody's objectives that they could allocate to a theme like this.
And finally, before I let you go. Tech giants are launching high powered AI models built specifically for cyber attack as well as defense. So where are you seeing institutional money rotating within the tech ecosystem right now to keep up with some of these events tools?
Yeah, we're still seeing money going into cybersecurity companies under no circumstances. You know, regardless of, uh, you know, of the power of an AI model, uh, our company is just going to roll over and say, you know, take my data. Uh, you know, have your way. What we are seeing is a move to a zero trust environment.
Um, so cybersecurity companies, while they are being, uh, you know, under attack from some of these, uh, AI models, they are also engaging and using those to help prevent and detect. So it really serves alongside the traditional, uh, uh, you know, human monitored type of approach, uh, while also, you know, leveraging AI to help detect and prevent these threats.
And we're seeing, you know, institutional money, uh, you know, continue to get behind that. And I think the returns this year, uh, you know, provide a little bit of backup to that as well.
Well, this is a fast moving space. So I appreciate your time. Nate, thank you so much for joining us today. And thank you so much for sharing all of your insights as well as your perspective.
Thank you.
