Public companies founded to thwart the kinds of insidious cyber-attacks that have hit the Internal Revenue Service (IRS) and large public companies have become prime investment opportunities for the first and largest cyber security exchange-traded fund (ETF), PureFunds ISE Cyber Security ETF (NYSE: HACK).
A key potential benefit of investing in an ETF of cyber-security companies is to limit the risk caused by an individual stock plunging in price and enhance the chances that the most successful companies in the sector will be held by the fund. With the frequency and the financial toll increasing from cyber-attacks, HACK offers a chance to profit from the trend, even if investors personally may be victimized by the perpetrators.
The danger is real, since hundreds of millions of people around the world have been affected by cyber-attacks and the high cost of overcoming the effects of such incidents is spurring government agencies and businesses to spend billions of dollars annually to protect against sophisticated hackers. The high-profile nature of cyber-attacks has ensured investors are well aware of the growing importance of cyber security and guarding against identify theft.
Cyber-attacks cause $300 billion to $1 trillion a year in losses, according to a study by the Center for Strategic and International Studies (CSIS).
Companies that have been hurt by cyber-attacks in recent years include Target (NYSE: TGT), Home Depot (NYSE: HD), Sony (NYSE: SNE), JPMorgan Chase (NYSE: JPM), Anthem Blue Cross and Ashley Madison. The Federal Bureau of Investigation estimates that more than 500 million financial records were stolen in 2014 alone, with the vast majority caused by cyber-attacks.
HACK, a fund that seeks to provide results that correspond to the performance of the ISE Cyber Security™ Index by tracking software and hardware companies engaged in the cyber security industry, had been on the ascent before pulling back with the rest of the market in late August. HACK’s reduced price enhances its appeal as an investment you may want to consider for your own portfolio.
Quarter End Performance September 30, 2015
Since Inception 11/12/2014
|Market Value %||1.00%|
Performance is annualized for periods greater than 1 year.
Expense Ratio: 0.75%
Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Funds may be lower or higher than the performance quoted. All performance is historical and includes reinvestment of dividends and capital gains. Performance data current to the most recent month end may be obtained by calling 877-756-PURE.
Short term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns.
Net assets of HACK total $1.13 billion as of September 30, 2015, and include 35 holdings, with an expense ratio of 0.75%. The fund’s average daily trading volume for the past three months tops 1.3 million shares. In addition, its diversification within the cyber security sector avoids taking too large of a position in any one stock, allowing HACK to potentially dampen volatility and possibly reduce risk.
The fund is re-balanced quarterly and applies “smart-beta investment techniques” that use alternative index construction rules aimed at producing risk-adjusted returns that outperform market-capitalization-weighted indices. Smart-beta investing emphasizes trying to profit from market inefficiencies. HACK also seeks to identify and invest in new entrants into the cyber security field that warrant inclusion among its holdings.
Cyber security has been one of the fastest-rising investment sectors in the technology industry since the launch of HACK in November 2014, according to Doug Fabian, editor of the monthly investment newsletter Successful ETF Investing and the free e-letter Weekly ETF Report. One reason for the interest in such investments is that even foreign governments are suspected of trying to steal intellectual property.
HACK also has the potential to benefit from mergers and acquisitions activities in the cyber security sector. Indeed, many of the companies in the fund could be takeover candidates.
In addition, the prospect that government regulation may require further security to protect against cyber theft provides another possible boost for the value of the fund if stringent security standards are adopted. Plus, the fund’s share price and trading volume typically rise when major cyber-security attacks occur.
The “Internet of Everything” offers “incalculable benefits,” as millions of devices become connected throughout the world, explained Nicholas Vardy, who is a chartered financial analyst and the editor of the Alpha Investor Letter, a monthly investment newsletter.
“According to Symantec’s annual Internet Security Threat report, cyber-attacks and cybercrime against large companies — those with over 2,500 employees — rose 40% globally in 2014,” Vardy wrote on Eagle Daily Investor. “Attacks on small and medium-sized companies, which accounted for 60% of targeted attacks, increased 26% and 30%, respectively.”
The Gartner Group predicts by 2020 there will be more than 26 billion Internet-connected devices, 250 million Internet-connected automobiles and a $50 billion market for surveillance. As a result, the potential market for cyber security not only is huge now but destined to grow strongly.
Chris Versace, the editor of the Growth & Dividend Report investment newsletter, described cyber security as one of the “most exciting investment opportunities” in an otherwise flat-lining market. Retail stores particularly need help, Versace explained, since the average cost of cybercrime for them more than doubled to $8.6 million in 2014, compared to 2013, according to the Ponemon Institute.
Top Ten Holdings October 1, 2015
% Total Net Assets
Market Value $USD
|CYBERARK SOFTWARE LTD||4.11||CYBR||854,504||43,699,334.56|
|JUNIPER NETWORKS INC||4.02||JNPR||1,639,996||42,705,495.84|
|VASCO DATA SEC INTL||3.96||VDSI||2,448,262||42,061,141.16|
|CHECK POINT SOFTWARE||3.94||CHKP||523,191||41,829,120.45|
|CISCO SYS INC||3.86||CSCO||1,592,095||40,964,604.35|
|TREND MICRO INC||3.82||4704 JP||1,171,515||40,543,612.14|
The fund’s top 10 holdings on Oct. 1 totaled 39.38% of its investments.
Fund holdings are subject to change and should not be considered a recommendation to buy or sell any security.
If you are interested in gaining exposure to technology stocks, we believe a specialized cyber-security fund such as HACK is well worth considering.
Investing involves risk, including the possible loss of principal. Brokerage commissions will reduce returns. Narrowly focused investments typically exhibit higher volatility. Investments in foreign securities involve political, economic and currency risks, greater volatility and differences in accounting methods. These risks are greater for investments in emerging markets.
Diversification does not guarantee a profit or protect from loss in a declining market. Investments in smaller companies tend to have limited liquidity and greater price volatility than larger capitalization companies.
PureFunds are distributed by Quasar Distributors, LLC
Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Funds’ statutory and summary prospectus, which may be obtained by calling 1-877-756-PURE (1.877.756.7873), or by visiting www. PureETFs.com. Read the prospectus carefully before investing.
Opinions expressed are those of the author or Funds and are subject to change, are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.