ETF Spotlight: ISE Cyber Security ETF (HACK)

PureFunds ISE Cyber Security ETF is the first ETF of its kind to offer targeted exposure to companies involved in the cyber security industry, including both cyber security infrastructure providers and cyber security service providers.

Making its debut in November of 2014, HACK seeks to capitalize on the rapidly growing need for cyber security on an individual, company, and government level. Millions of cyber attacks occur each day, and according to IBM’s security services department, studies show that companies are attacked an average of 16,856 times a year. Furthermore, the study emphasize the significant financial consequence of such a security breach, which include a loss of revenue and productivity, among other objective and subjective factors.

Given the increasing complexity, size, and scope of these breaches, demand for cyber security goods and services has skyrocketed, making HACK a compelling option for those looking to tap into this industry.

HACK’s portfolio consists of approximately 30 individual holdings, the majority of which are U.S. companies, though there is some exposure to equities from Israel, Japan, and the Netherlands. Roughly half of the portfolio is allocated to the systems software sub-industry. Other sub-industries include:

• Communications Equipment
• Application Software
• IT Consulting & Services
• Internet Software & Services
• Aerospace & Defense

Mid-, small-, and micro-cap stocks account for the vast majority of HACK’s holdings, though there are some giant and large cap stocks featured in the portfolio. Some of the companies including in the portfolio are Infoblox Ink, KEYW Holding Corp, Juniper Networks Inc, Fortinet Inc, and Cisco Systems Inc..

Be sure to also check out our interview with Christian Magoon where he gave us his insights about the cyber security industry as a whole in addition to taking a deeper dive under the hood of the HACK.

Given HACK’s relatively short history, it is a bit difficult to pinpoint which factors will most affect the performance of the fund. There are, however, several aspects of HACK that investors should be aware of.

First, and foremost, technology equities tend to exhibit higher levels of volatility compared to the broader market. The companies in HACK’s portfolio in particular are primarily younger, smaller, and less-established companies, meaning the stocks could experience volatile price movements.

Another factor to consider is the fund’s exposure to foreign companies. The risks involved in this type of exposure include political, economic, and currency risks. Be sure to check out our article on Controlling Risk with ETFs.

HACK should by no means be used as a core holding for traditional buy-and-hold investors. Instead, this fund is more suitable for those investors looking to establish a tactical tilt towards a rapidly growing industry. Given HACK’s targeted focus, investors should be prepared to tolerate significantly higher levels of risk as compared to a broad equity fund, or even a diversified technology fund.

Lastly, HACK is more appropriate for those investors focused on boosting capital appreciation, as this fund will likely not feature attractive payouts and yields.

HACK charges an expense ratio of 75 basis points, making it slightly more expensive than the average fees charged by ETFs in our ETFdb Technology Equities Category.

For those willing to stomach the risk, the ISE Cyber Security ETF (HACK) is a compelling way to tap into the growing cyber security industry. As always, be sure to take a close look under the hood of HACK to fully understand the risk associated with this fund.

Follow me on Twitter @DPylypczak

Disclosure: No positions at time of writing.