In this week’s Macro Theme, we review our “Slowing Dragon” theme. We began discuss...
HACK: New ETF Targets Cyber Security
03/30/2015 10:00 am EST
Launched last November, PureFunds ISE Cyber Security ETF is the first ETF focused solely on the cyber security industry. Manager Andrew Chanin discusses the outlook for the sector, the strategy behind the new fund, and a trio of leading stocks within this fast-growing market.
Steven Halpern: Joining us today is Andrew Chanin, CEO of PureFunds and manager of the PureFunds ISE Cyber Security ETF. How are you doing today, Andrew?
Andrew Chanin: Very well, thanks for having me, Steven.
Steven Halpern: Well, your new fund with a great symbol (HACK) was launched last November and it’s the only Pure Play ETF focused on the cyber security sector. Could you tell our listeners a little more about the fund and its longer-term investment strategy?
Andrew Chanin: Certainly, thank you for the introduction as our cyber security ETF—HACK—was launched in November.
It was an idea that we had been very interested in seeing turned into an EFT for a long while now and really realized the investing appetite for this commonly misunderstood but highly coveted type of equity schematic play.
We saw this demand and wanted to create a fund to give investors access to be able to invest in this constantly changing and evolving industry, and sub-sector within technology, without needing to be an expert in every single company.
We realized that by turning this into an ETF type of investment, investors can currently now receive roughly 30 companies from around the globe that are focused in all different areas of expertise but in the cyber security industry, including companies that develop, sell, cyber security hardware, cyber security software, and provide consulting services for companies and government agencies around the world.
Steven Halpern: Before we look at some individual stocks in the cyber security ETF, could you share your thoughts on the general outlook for the cyber security sector?
Andrew Chanin: Certainly, well, as I kind of mentioned, this is an area that is seeing significant expansion and wasn’t really on anyone’s radar until the last several years.
As we’ve seen an increase in cyber attacks and breaches around the globe, and an increase in sophistication and the damage that they can occur, it’s become an area that corporations and governments can no longer ignore and just hope that they will not be a victim.
It’s now forcing people, and companies, and government agencies to take a more proactive stance in thwarting potential breaches and then—if they are actually breached—to figuring out what solutions they can implement to minimize and figure out what the actual damage is and have it corrected going forward.
And as far as looking at some numbers, back in 2000, your federal government spent less than a billion dollars on cyber security, and for this year’s budget, it’s been allotted for roughly $14 billion from the federal government for spending in cyber security defense.
This is an area that Gartner believes will be a $77 billion industry this year, and there’s a prediction that by 2020, that this industry can be over $150 billion.
So, I think what we’re seeing is that companies and agencies are looking how to protect themselves and that increased spending on cyber security solutions and prevention is now becoming a significant spend for many companies.
The amount of impact that actual hackers can do is so much greater and requires so fewer resources, that anyone can be vulnerable but no one wants to be the next front-page news story.
Steven Halpern: As you mentioned, you hold 30 stocks in the ETF, but let’s look at a few stocks in particular, so listeners can get an idea of the opportunities you see within this sector. First off, you highlight FireEye (FEYE). What’s the story here?
Andrew Chanin: This is a company that has been around for several years and they most recently have seen their name pop up on many, many news breaks, specifically with Sony and Anthem. They have these two business units—one being their Mandiant Consulting—and this is a group that will work on the consulting side to protect companies and build a strategy.
Then they also have their product side and they have kind of a belief of “detect, analyze, and resolve,” so, essentially, as companies become breached, they will use their analytics to look at how potential cyber breaches may have occurred and what kind of information they’re looking at.
And once they’ve detected a breach, they’ll go on to taking what they’ve analyzed and finding a way to minimize the disaster there and to recover and learn from that. So they’ve been one that has—on several times—been a potential name for M&A activity as well.
Steven Halpern: You also point to VASCO Data Security International (VDSI). What’s the attraction here?
Andrew Chanin: Certainly, so, one of the big themes in cyber security is that once theft authentication—being kind of user name and password—is an obsolete strategy for threat prevention and that more sophisticated types of password and login systems are required for this modern age.
VASCO Data is a company that has many clients in the financial industry where some of these passwords can be extremely critical for both the company as well as their clients.
A most recent contract that they won that was from the Singapore government. They specialize in two factor authentication and multi-factor authentication, essentially, trying to make it more difficult for hackers to be able to breach their infrastructure from the get go.
Steven Halpern: Now let’s look at CyberArk (CYBR) which itself was an IPO last year. What’s the outlook there?
Andrew Chanin: Sure, so this is a company that IPO'ed on the New York Stock Exchange in September and has been a company that many people have focused on to kind of show the growth and interest in the cyber security space and from a lot of fanfare to the launch.
It’s continued to be on many people’s radar, and essentially, they focus on privilege access management, and essentially, who can use the information stored within a company’s system.
And are they using that correctly in managing who can do what and how they’re doing it and this company, I think, will be an indicator for how future IPOs can be in this industry and that appetite for new investment in this space.
Steven Halpern: Now, finally, what time frame do you recommend for investors looking at PureFunds Cyber Security ETF? Would this be best considered a trading vehicle or best suited for long-term investors?
Andrew Chanin: Great. So, I think there are many people that agree that cyber security is an industry where there’s going to be significant spending on prevention and solutions.
So, I think people that currently may have exposure to technology—maybe through a larger technology-based type of investment—they’re not really getting that much exposure to cyber security.
So, for someone looking to have this exposure because they believe in the long-term growth potential, this could be a longer-term hold as this industry develops and becomes more mature.
At the same time, it can also be a trading vehicle, and we’ve seen around times of cyber attacks, increase activity because this vehicle does give you that exposure to many companies.
Whereas, it may be difficult to pick which company would be the immediate beneficiary of some type of cyber breach, this is giving you the access to the wider entire sub-industry of cyber security.
So, it can be used for either type of investor and we’re seeing investors currently using both of those strategies.
Steven Halpern: Again, congratulations on the launch of the fund and for our listeners, the symbol is HACK. Thank you so much for joining us today, Andrew.
Andrew Chanin: Thank you for the opportunity, Steven. Have a great day.
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