HACK: Why Your Portfolio Should Include Cybersecurity

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About: PureFunds ISE Cyber Security ETF (HACK)
by: The Bull Case
Summary

The cybersecurity industry is becoming increasingly important.

Recent cyberattacks have highlighted the need for cybersecurity services.

Explosive growth in the Internet of Things provides room for industry growth.

Investment Thesis:

The cybersecurity industry provides increasingly important products and services to businesses and governments around the world as cybercriminals continue to grow in number and strength. The PureFunds ISE Cyber Security ETF (NYSEARCA:HACK) holds a variety of companies that stand to benefit from this trend. With large growth prospects for both the cost of cyberattacks and the number of Internet-connected devices, the cybersecurity industry should continue to boom in the coming years.

Fund Overview:

With an increasing number of cyberattacks occurring around the world, HACK gives investors an opportunity to profit off of the companies that are at the forefront of protecting corporations, consumers, and governments against malicious digital activity. The fund seeks to replicate the performance of the ISE Cyber Security Index. This index tracks companies that are directly involved in the cybersecurity industry and screens companies for eligibility based upon the following criteria:

  • Be a direct service provider (hardware/software developer) for cyber security and for which cyber security business activities are a key driver of the business, or a company whose business model is defined by its role in providing cyber security services and for which cyber security business activities are a key driver of the business;
  • Not be listed on an exchange in a country which employs restrictions on foreign capital investment such that those restrictions render the component effectively non-investible [sic], as determined by Nasdaq; and
  • A minimum market capitalization of $100 million.

Since the fund's inception on November 12, 2014, the market return has been relatively in line with the S&P 500 Index at approximately 20%. The expense ratio for the fund currently stands at 0.60%.

Holdings:

The fund currently holds 39 positions, as well as some cash. As of June 14, 2017, the fund's holdings and their respective weights are shown in the table below:

Ticker

Company

Shares

Market Value

% Of Holdings

FEYE

FIREEYE INC.

3621255

54789588.15

4.90%

IMPV

IMPERVA INC.

994458

49126225.2

4.40%

QLYS

QUALYS INC.

1166653

48357766.85

4.33%

GIMO

GIGAMON INC.

1197490

48318721.5

4.32%

4704 JP

TREND MICRO INC.

922123

47701076.14

4.27%

CHKP

CHECK POINT SOFTWARE TECH LTD. ORD

412200

45778932

4.10%

PFPT

PROOFPOINT INC.

517637

45769463.54

4.10%

JNPR

JUNIPER NETWORKS INC.

1456281

42523405.2

3.81%

SYMC

SYMANTEC CORP.

1427193

41831026.83

3.74%

FTNT

FORTINET INC.

1091696

41418946.24

3.71%

CYBR

CYBERARK SOFTWARE LTD.

806141

39363865.03

3.52%

SPLK

SPLUNK INC.

660477

38367108.93

3.43%

CUDA

BARRACUDA NETWORKS INC.

1723334

38102914.74

3.41%

CSCO

CISCO SYS INC.

1192952

37816578.4

3.38%

PANW

PALO ALTO NETWORKS INC.

268381

36164339.75

3.24%

RDWR

RADWARE LTD.

1981455

35408600.85

3.17%

SAIC

SCIENCE APPLICATNS INTL CP NEW COM

468789

34934156.28

3.13%

AKAM

AKAMAI TECHNOLOGIES INC.

651338

32325904.94

2.89%

SOPH LN

SOPHOS GROUP PLC

5647748

32190730.18

2.88%

MIME

MIMECAST LTD.

866716

23383997.68

2.09%

VRNS

VARONIS SYS INC.

622555

22567618.75

2.02%

VDSI

VASCO DATA SEC INTL INC.

1620943

22450060.55

2.01%

KEYW

KEYW HLDG CORP.

2314343

21639107.05

1.94%

053800 KS

AHNLAB

415491

20512163.7

1.84%

VRSN

VERISIGN INC.

206779

18940956.4

1.70%

MANT

MANTECH INTL CORP.

465771

18854410.08

1.69%

VRNT

VERINT SYS INC.

451827

18863777.25

1.69%

BAH

BOOZ ALLEN HAMILTON HLDG CORP CL A

476834

18687124.46

1.67%

BA/ LN

BAE SYSTEMS

2175863

18301703.27

1.64%

LDOS

LEIDOS HLDGS INC.

320043

17823194.67

1.60%

RPD

RAPID7 INC.

1043095

17784769.75

1.59%

GTO NA

GEMALTO

282502

16479758.25

1.47%

FFIV

F5 NETWORKS INC.

119048

15492906.72

1.39%

ATEN

A10 NETWORKS INC.

1803160

15308828.4

1.37%

ZIXI

ZIX CORP.

2062394

12147500.66

1.09%

3692 JP

FFRI INC.

239600

10651793.26

0.95%

PREC SS

PRECISE BIOMETRICS

19368852

6370490.28

0.57%

FSC1V FH

F-SECURE OYJ

1086168

5173619.8

0.46%

SCWX

SECUREWORKS CORP.

480196

4427407.12

0.40%

Cash & Other

Cash & Other

1265372

1265372

0.11%

As of the latest rebalancing period (March 31, 2017), the sub-industry and country exposures are as seen in these two charts:

Cybersecurity Growth:

In order to understand why cybersecurity firms are positioned to experience significant growth, we must first delve into what is fueling their demand. Cyberattacks and other digital crimes have seen a tremendous surge in recent years. Headlines were recently dominated by the ransomware cryptoworm known as "WannaCry" after it infected hundreds of thousands of computers in over 150 countries and held files hostage in the largest cyberattack the world has ever seen.

In the past, attacks like this may have caused financial harm to the victims or stolen sensitive information. However, when Britain's National Health Services systems were affected, people's lives became at risk. Robust cybersecurity systems are no longer merely a perk for businesses and organizations, but a necessity.

In the cybercriminal underworld, business is booming. According to Steve Langan, of Hiscox Insurance, in 2016 alone, "cybercrime cost the global economy over $450 billion, over 2 billion personal records were stolen and in the U.S. alone over 100 million Americans had their medical records stolen." There are no signs of a slowdown in cybercrime occurring anytime soon, either. Over the next five years, Juniper Research estimates the total global cost to businesses as a result of digital attacks to be upwards of $8 trillion (yes, trillion with a T).

Further compounding the issue of cybersecurity is the rise of the Internet of Things. In the past, cyberattacks were primarily limited to personal computers and data centers. However, with an ever-increasing number of smart devices with Internet-connected capabilities, the number of targets for attackers has grown exponentially.

IHS has estimated that the total number of IoT devices will double from 15.4 billion in 2015 to 30.7 billion in 2020. By 2025, the total number of devices is expected to breach 75 billion. This trend provides ample room for growth for cybersecurity companies as they expand their services to include not only computers and phones, but cars, home automation systems, and smart appliances as well.

Risks:

In all of my articles, I like to include a risks section in order to address some of the pitfalls with a particular thesis and approach an investment opportunity with more balance. I attempt to touch only on risks that are not completely obvious, such as an economic downturn being a risk to retail companies. However, for this particular fund and this particular industry, the risks tend to fall into that category. Barring any major and unexpected shift away from the adoption of technology and Internet-connected devices by consumers and businesses, which is extremely unlikely, this industry stands to experience secular growth in the medium to long term.

Conclusion:

The PureFunds Cybersecurity ETF is a great addition to the portfolio of those who want to capture the value of the exploding cybersecurity industry. The reality that cybersecurity is a necessity in today's world is quickly being realized. Cybercriminals are becoming increasingly sophisticated in their attacks and will continue to do so going forward. The growth projections for the number of devices that will need to be protected in the future ensure strong profits for the industry for years to come.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.