HACK: New ETF Eyes Cyber Security

12/08/2014 10:00 am EST

Focus: ETFs

Christian Magoon discusses a newly-launched ETF focused on the cyber security sector; here, he explains the structure of the fund, the attraction of the industry, and highlights some of the ETF's top holdings.

Steven Halpern: Our guest today is Christian Magoon, founder of YieldShares and a consultant to ISE ETF Ventures.  How are you doing today, Christian?

Christian Magoon: I’m doing great Steven, thanks for having me.

Steven Halpern: Thank you for joining us.  Our topic today is a recently launched ETF—the PureFunds Cyber Security ETF—with the appropriate symbol (HACK).  Could you tell us about the fund and the ISE Cyber Security Index that it’s based on?

Christian Magoon: Yes, so the PureFunds ISE Cyber Security ETF is a basket of companies that are involved in cyber security and solutions—areas like hardware, software, and services—and the ETF selects its portfolio based off an index and that index is an index of 30 companies called the ISE Cyber Security Index.

So, this is an indexed-based ETF of companies in the cyber security industry and you’re right, the ticker HACK is how to best probably find it when looking it up.

Steven Halpern: Now, can you share some background on the cyber security sector in general and what makes it particularly attractive now?

Christian Magoon: Yes, well, cyber security has definitely been in the news.  I think as we’re recording this interview we’ve heard recently of attacks on Sony and other corporate attacks that have affected companies like Target. The amount of cyber security threats is just increasing.  

A recent study by PWC reports that cyber security incidents have grown at a rate of 66% a year going back to 2009.  A lot of this is due to the fact that companies and governments are increasingly using digital data, and because of that, that’s tempting cybercrime to increase and try to go out and steal data and other packets of information.  

You know, the current estimate is cybercrime is costing the world economy about $400 billion a year and that’s only growing.  In fact, about 69% of US executives are concerned that cyber threats will impact their actual business growth.

So, this is an area that more money is being spent in—a lot of research and development is going into—yet, until recently, there really wasn’t a way for investors to buy a basket of companies focused in this high growth sector.

Steven Halpern:  Could you highlight some of the top holdings of the Pure Funds Cyber Security ETF?

Christian Magoon: Yes, so, what’s interesting about many of these companies is they’re fairly unknown.  For example, if you own some of the larger technology ETFs, like the QQQ NASDAQ 100 Index (QQQ), or (XLK), the SPDR Technology ETF, you’ll find that there is less than a 5% portfolio weight overlap in these ETFs versus the cyber security ETF.  

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So, many of these names are new to investors, so one of the top holdings of the ETF and the Index is VASCO Data Security International (VDSI) and they basically focus on two-factor authentication for users and they really create the software that’s repackaged and sold through a variety of different platforms through companies like Cisco, and Checkpoint, and Juniper.  

Another company is Imperva (IMPV) and they focus on firewall technology solutions, which is a software solution.  They do a lot of endpoint security business, so they’re focusing on individual devices.  They also have some network security and data setters security business lines and products as well.  

These companies are both under a billion dollars of market cap, they’re both listed here in the US, but they’re relatively unknown by most investors, yet they’re two premier companies when it comes to cyber security solutions worldwide.

Steven Halpern:  Could you explain the benefit of investing in this sector via an ETF rather than having somebody select individual stocks on their own.

Christian Magoon:   Sure, so, you can always certainly try to, so to speak, take a rifle shot and try to select the one or two or three best companies in this area.  

That definitely is a harder thing to do.  I think one of the sayings is, “It’s easier to be in the right sector than the right stock.”

And what the ETF does—in the fact that it focuses on an index—is it owns a basket of the actual companies that’s diversified, not only by business—some are involved more in the hardware or the software side, other companies are involved more in providing services or/and analysis to companies—so you get diversification by business and you get diversification by geography.

The fact that the fund actually has exposure to more than five different countries, but then you also get some diversification by actual business, so sectors that are represented here include communication equipment, internet software and services, even some aerospace and defense exposure through this.  

So, the ETF really gives you the chance to be in that sector and not have to take some of the individual business specific risk, or geographic risk, or sector risk per se on buying an individual company or two.  

With that being said, there are probably investors out there who might own some of the individual names and this may act as a way to diversify that exposure or to hedge some of the business specific risks of owning a natural individual cyber security name.

Steven Halpern:  Well, we really appreciate you taking the time today.  Thanks so much for joining us.

Christian Magoon:   Thanks, Steven.

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