Cybersecurity ETFs Booming After New Global Data Attacks

Cybercriminals are operating at high efficiency these days, as exemplified by a spate of recent attacks that have targeted major global data networks.

Most notable were attacks on Fed Ex servers and on the U.K.’s National Health Service, impacting 200,000 computers in over 150 countries.

The fallout has been swift, but the attacks may lead to portfolio profit if investors steer cash into cyber-security ETFs, which, as a group, have hit 52-week highs.

The benchmark cyber security ETF -- the $967 million PureFunds ISE Cyber Security ETF -- climbed from $25 per share to $31/share as of early June. It boasts a year-to-date return of 9.5 percent.

The other main cyber defense ETF is First Trust Nasdaq Cybersecurity ETF (CIBR), and it’s also going great guns, with a 9.42 percent year-to-date growth rate. That’s likely no coincidence, as cybercrime is on the rise, and is increasingly on the radar screen of corporate executives.

Case in point: 2014 study by the Center of Strategic & International Studies estimated that the global economy loses $400 billion is lost to cybercrime on an annual basis.

'Extremely Hot Topic'

Additionally, PWC reported that 69 percent of U.S. corporate executives are concerned that cyber threats will impact growth.

“Cyber security is an extremely hot topic right now,” said Nick Santora, director of the cyber security team at Curricula in Atlanta, which trains companies on how to avoid getting hacked by cybercriminals.

“Because of this, we’re seeing a ton of investment and innovation on technologies pushing towards a more secure future,” he explained.

The challenge is identifying the right companies in which to invest, since all are not equal, Santora said.

“What you will see in the next several years are a significant amount of acquisitions made by companies such as IBM, Cisco, Microsoft, Fireeye, and many of the big players to expand their portfolio,” he noted. “These acquisitions will be made due to the amount of competition now in this space, as well as quick innovation. It is much easier to absorb a company, its technology, and portfolio, then to start from scratch.”

For advisors looking to get clients into the cybersecurity investment realm, starting with the HACK ETF may be the best (and easiest) way to go, with CIBR another good option.

“HACK is the world's first Cyber Security ETF. It was created back in 2014, so it has two-and-a-half years of trading history,” said Colin Exelby, president of Celestial Wealth Management in Towson, Md.

HACK seeks results that correspond to the ISE Cyber Security(r) Index, Exelby said.

“It holds roughly 40 names in the portfolio and has an expense ratio of 0.60 percent, thus it provides diversification yet a thematic focus,” he said.

Look at Defense Sector

It’s also a good idea to look at companies in the defense sector who are rolling out new cybersecurity programs and services, Exelby noted.

“In an effort to protect companies and countries from cyber threats, defense spending could become even more focused on protection,” he said. “With a number of industries experiencing flat or even declining revenues, this sector appears to be one where both the fundamentals for growth look attractive and due to a correction in the past two years, so valuations look reasonable.”

Cybersecurity experts advise investors to also focus on funds that include risk management companies, who are making significant inroads into the cyber defense market.

“Risk-based developers deserve a look, but you need to be careful,” said Ashwin Krishnan, a technology industry expert with over two decades of experience in cybersecurity and cloud technologies. “Instead of blindly spending on suspect solutions to reduce ‘insider threat,’ target companies that create a risk-based framework to assess which of a client company’s employees are at highest risk for a data breach.”

Risk management companies that can answer the question “what is my risk appetite?” should be the investor focus, he added.

The ETFs that include vendors who “offer the best risk-based solutions, as well as cyber insurance and consulting organizations that offer risk based insurance and services, have the most to gain,” Krishnan noted.

Another path to profit on the cybersecurity ETF front are funds that hold companies in banking or big data in their portfolio.

“Those funds should benefit,” said Vladimir Fomenko, chief executive officer at King Servers B.V., a Russia-based technology firm. “The cybercriminals are interested in them most of all. That’s especially so as the percent of new threats will grow.”

As the cybersecurity threat grows, and with it the rising number of cyber defense companies up and running, expect the spotlight to shine more brightly on cybersecurity ETFs.

No doubt, they should be on the radar screen of financial advisors looking for growing sectors for their clients, and sooner rather than later.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected].

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