How Cyber Security Became A Major Investment Theme

Get used to it: Global cyber-attacks on governments and corporations are not just a fixture in the daily news; they’re here to stay. And this time around, the U.S. government is the latest victim.

In early June, it was revealed that hackers – allegedly based in China – breached private data from the U.S. federal Office of Personnel Management, exposing personal information on about four million current and former employees. The scary part of this particular invasion is that the U.S. government underestimated the extent of the attack and later it was reported that U.S. officials said even more private data was exposed than previously acknowledged.

Data breaches are expensive ordeals and a report by IBM and the Ponemon Institute (which conducts independent research on privacy, data protection and information security policy) found that an average data breach cost a U.S. company $6.5 million in 2015.

The impact of cyber-theft is providing a fertile landscape for alert investors.

While many of our colleagues are just beginning to understand the investment potential of investing in the cyber-security sector, it’s a mega theme we alerted our subscribers to about six months ago.

On Dec. 10, 2014 we wrote to subscribers via our Weekly ETF Picks:

“What we’re witnessing is the unfolding of a major investment theme and we’re buying the PureFunds ISE Cyber Security ETF (CHACK) at $26 as a direct way to capitalize. HACK owns a small basket of 30 global stocks focused on software systems and other solutions that defend against cyber-attacks.”

Cyber performance

The chart here shows how HACK’s six-month performance has eclipsed two of the globe’s most popular ETFs by assets – the SPDR S&P 500 ETF (SPY) and Nasdaq-100 (QQQ). As you see, HACK has outperformed QQQ by 23% and SPY by a whopping 25.2%.

When we first issued our buy alert on HACK in mid-December, the fund was just one-month old and received little notice on Wall Street.

On April 21, HACK broke above $30 per share and is now among the top performing unleveraged sector ETFs this year.

Among HACK’s top 10 holdings are Infoblox (NYSE:BLOX), KEYW Holding Corp. (NasdaqGS:KEYW), Proofpoint (NasdaqGM:PFPT), and FireEye (NasdaqGS:FEYE). These companies offer cyber security solutions including hardware, software and services.

It’s important to note that while HACK’s double digit YTD gains are indeed impressive, this particular ETF does not use any leverage to magnify its performance returns.

HACK is linked to the ISE Cyber Security Index and is rebalanced semi-annually. The index uses a modified equal weighting method which means that no single stock represents more than 20% of the weight of the index. Additionally, the cumulative weight of all components with an individual weight of 5% or greater do not in the aggregate account for more than 50% of the weight of the index.

Research firm Gartner predicts that global IT security spending will grow 8.2% to reach $76.9 billion this year.

The U.S. accounts for almost 70% of HACK’s country exposure with Israel (13%) and the Netherlands (4.95%) just behind.

The ETF Profit Strategy Newsletter provides detailed analysis on major market trends, and which long/short ETFs offer high profit potential. Investments are carefully selected from a universe of more than 2,000 ETFs and each issue contains our proprietary global equity map, our mega-investment theme report, and a complete rundown of yield and performance data for major ETFs. Subscribers also get access to our Weekly ETF Picks and Technical Forecast.

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Ron DeLegge is the founder of ETFguide.