Cyber Security ETFs in Hot Spot: Here's Why

After slumping in mid-May, cyber security stocks have been on fire lately thanks to the volley of cyberattacks and acquisition buzz. This is especially true, as the hacking of emails of the Democratic National Committee (DNC) as well as cyberattacks on both Hillary Clinton’s presidential campaign and the Democratic Congressional Campaign Committee in July brought back the allure for the otherwise dull cyber security world (read: Cyber Security Stocks to Buy After DNC Leaks).

The latest catalyst is Yahoo’s YHOO high-profile data-security breach wherein at least 500 million accounts were stolen from the company in what is touted to have been one of the largest cybersecurity breaches ever. All these have has increased the need for more stringent cyber security from hackers.  

Coming to merger talks, cybersecurity-software provider Imperva IMPV and networking security-hardware company Juniper Networks JNPR are the possible acquisition targets. Cisco Systems CSCO and International Business Machines IBM are among the suitors for Imperva while regulatory concerns could limit the number of suitors for Juniper.

Cybersecurity Stocks and ETFs on Rise

As a result, many cyber stocks saw a torrid run over the past three months. Among the most notable is Symantec SYMC, which hit a new 52-week high of $25.37 per share early last week, representing a gain of 25.1% in the same timeframe. Palo Alto Networks PANW and Imperva saw their shares surging 28.3% and 27%, respectively, while Cisco and Juniper gained 13.7% and 11.4%, respectively (read: Time to Buy These Tech ETFs?).

The solid run for the stocks pushed up cyber security ETFs with PureFunds ISE Cyber Security ETF HACK and First Trust Nasdaq Cybersecurity ETF CIBR surging 22.3% and 19%, respectively, over the past three months.

HACK in Focus

The fund offers exposure to those companies that ensure the safety of computer hardware, software, networks and fight against any sort of cyber malpractices. It tracks the ISE Cyber Security Index, holding 35 securities in its basket. The above-mentioned five stocks are among the top 10 holdings in HACK, accounting for more than 4% share each.  

From an industrial look, software and programming accounts for nearly two-thirds of the portfolio while communication equipment, IT consulting and data services, and Internet mobile applications round off the next three spots. In terms of country exposure, U.S. firms take the top spot at 75%, followed by Israel (11%), the United Kingdom (6%), Japan (4%), South Korea (2%), the Netherlands (1%), and Finland (1%) (see: all the Technology ETFs here).

The fund charges 75 bps in annual fees and sees volume of 199,000 shares a day on average. It has amassed about $807 million in its asset base.

CIBR in Focus

This ETF has accumulated nearly $101 million in its asset base and charges 60 bps in annual fees. It trades in a light average daily volume of around 25,000 shares. The fund follows the Nasdaq CTA Cybersecurity Index, which measures the performance of companies engaged in the cyber security segment of the technology and industrials sectors. In total, the product holds 34 stocks in its basket with the in-focus five firms accounting for one-fourth of the portfolio.

Further, it is skewed toward the software industry at 50.9% while communications equipment rounds off the next spot with a double-digit allocation. Like HACK, American firms account for 74% of CIBR while the Netherlands, Israel, United Kingdom and many others make up for a single-digit allocation.

What’s Ahead?

With ceaseless cyber-attacks, extensive adoption of Internet usage in mobiles and computers, and new markets such as the Internet of Things (IoT), the cloud, and the broader digitalization of commerce, the need to secure data has increased pushing the demand for security solutions higher (read: Invest in the Internet of Things with This ETF).

The cyber security market topped $75 billion in 2015 and is expected to grow to $101 billion by 2018, as per market research firm Gartner. Research and Markets expects the cybersecurity market to reach $202.36 billion by 2018 from $122.45 billion in 2016 at a compound annual growth rate (CAGR) of 10.6%.

As the industry is flourishing with ample growth potential in the years to come, many investors may want to jump into the space to tap the spending boom and growing demand for cyber security.

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CISCO SYSTEMS (CSCO): Free Stock Analysis Report
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PALO ALTO NETWK (PANW): Free Stock Analysis Report
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