Cybersecurity ETFs gain as semis correct 7% in tech rotation

A rotation out of semiconductors into cybersecurity stocks has reshuffled tech sector leadership over the past month, with the VanEck Semiconductor ETF sliding 7% from record highs.

A rotation out of semiconductors into cybersecurity stocks has reshuffled tech sector leadership over the past month, with the VanEck Semiconductor ETF (SMH) sliding 7% from record highs while cyber-focused funds attract inflows.

"The unwind of crowded long positions in semis has been sharp, but cybersecurity benefits from structural demand that is less tied to any single technology cycle," said Financial Serenity, a Seeking Alpha analyst covering the iShares Cybersecurity and Tech ETF (IHAK).

IHAK, which holds about $1 billion in assets across major cybersecurity companies, trades at roughly 27 times forward earnings with a PEG ratio of 1.53, according to Seeking Alpha. Global cybersecurity spending is expanding at double-digit rates annually, supported by regulatory requirements and the growing complexity of threats. The fund's expense ratio stands at 0.47%.

The rotation highlights a growing divergence within the tech sector: semiconductor stocks, which led the AI rally for two years, are now facing valuation compression as investors question whether hardware spending can sustain its pace. Cybersecurity, by contrast, offers recurring subscription revenue and less exposure to the boom-bust cycles that have historically defined chip stocks. For investors, the question is whether the rotation reflects a temporary repositioning or the start of a longer-term shift in tech leadership.

Semiconductor Selloff Deepens

The selloff in semiconductors has been concentrated among the names that benefited most from AI infrastructure spending. Nvidia, which briefly became the world's most valuable company in mid-2026, has pulled back alongside other chipmakers as concerns about export controls, China competition, and capacity oversupply have resurfaced. The Philadelphia Semiconductor Index has fallen from its June peak, erasing billions in market value. SMH, which had returned 363% over five years, is now down 7% in the past month alone, according to market data.

Cybersecurity's Defensive Appeal

Cybersecurity stocks, by contrast, have held up better. The iShares Cybersecurity and Tech ETF has maintained its valuation as investors prioritize companies with predictable revenue streams and defensive characteristics. Unlike semiconductor companies, which depend on large, lumpy hardware orders from hyperscalers, cybersecurity firms typically sell annual subscriptions with high renewal rates. IHAK's net revenue retention rates among its top holdings remain above 120%, a level that signals strong customer loyalty and pricing power.

What the Rotation Means for Investors

The rotation has implications for portfolio positioning. If the semiconductor correction deepens, the Nasdaq could face additional headwinds given the sector's outsized weighting in the index. Cybersecurity ETFs, with their lower correlation to hardware cycles, may offer a hedge. IHAK trades at a forward P/E of about 27 times, in line with the broader technology sector, while SMH has historically commanded a premium given its growth trajectory. Investors should watch for second-quarter earnings from major cybersecurity and semiconductor companies in the coming weeks for signals on whether the rotation has further to run.

This article is for informational purposes only and does not constitute investment advice.