This ETF's Got The 3 Hottest Cybersecurity Stocks

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F or some ETF investors, a hacker's pain is their gain. Several exchange traded funds invest in companies providing hardware, software and services to foil cyberattacks. They target an essential subindustry at a critical time.

High-profile data breaches atSony ( SNE ) movie studio andJPMorgan Chase ( JPM ) have put a spotlight on a fast-growing threat in our increasingly digital lives.

On Wednesday, President Obama authorized sanctions against instigators of such malicious activities.

"The number of cyberattacks is rising," said Neena Mishra, director of ETF research at Zacks Investment Research. "Almost all companies doing business digitally will have to increase their spending on cybersecurity."

That's good news forPalo Alto Networks ( PANW ),CyberArk Software ( CYBR ) andQualys ( QLYS ) -- three top-rated IBD cybersecurity stocks. Each is expected to see triple-digit earnings growth next quarter. So it bodes well for the funds holding them as well.

Various ETFs -- from Schwab U.S.Small Cap (SCHA) toSPDR S&P Telecom (XTL) -- hold one or another of these stocks. But cybersecurity names are often underrepresented in tech-focused funds.

PureFunds ISE Cyber Security (HACK), which launched in November, aims to fix that. New IPO CyberArk is HACK's largest holding with 5.5% of portfolio weight. Qualys and Palo Alto Networks are among its top 10 holdings, with 4.8% and 4.6% of assets respectively.

CyberArk is expected to grow EPS by 400% next quarter. Last quarter, EPS increased 200%.

Growth Stocks

Cybersecurity is a volatile space with many players in a growth-oriented phase, says Andrew Chanin, CEO of PureFunds. "That can make it difficult to choose individual securities," he said.

HACK's diversified ETF wrapper allows investors "to play the space while reducing the volatility," he added.

The ETF's proprietary, rules-based index tracks companies actively involved in the cybersecurity industry. Of 32 holdings, roughly 70% are U.S.-based.

HACK's assets have grown more than fivefold this year to $495.1 million. Year to date, it has served up a 5.2% stock market gain . By comparison, $12.83-billionTechnology Select Sector SPDR (XLK) is up 0.5%.

HACK has a 0.75% expense ratio vs. XLK's 0.15%. HACK's cost seems steep, but Chanin argues that it is "comparable to other specific, thematic plays."

Concentration Is One Risk

Risks include HACK's concentrated exposure to a niche space. Plus, the top 10 holdings account for 47.1% of total assets.

Some holdings are not yet making a profit or are trading at very expensive valuations, Mishra said. She gives Palo Alto Networks andFireEye (FEYE) as examples.

HACK is a "high-risk play with the potential of high rewards," she added, which makes "only a small allocation" advisable for investing success .

Still, with U.S. economic growth back on track, she's bullish on the outlook for the technology sector, as well as for HACK: "I see a lot of opportunity for this fund."

Although narrowly focused, the ETF is not particularly sensitive to economic conditions. Consumers and companies "don't have a choice" but to protect their online data, Mishra noted.

IBD's security software industry group has been in the top 20 of 197 groups for many weeks, though its ranking has slipped.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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