Over the last few weeks news about the Federal Government data hack has caused a lot of fear and worry from not only the over 4 million current and prior government employees, but all Americans. The thinking is that if hackers can break into the US government databases and retrieve very sensitive personal data on current and past employees, what can't they hack into?
Well it seems like the hackers can and have gained access to nearly whomever they want. Besides the recent hack of the US Government, other notable high-profile hacks over the past few years consist of JPMorgan Chase in 2014; Home Depot in 2014; Target in 2013; Visa and MasterCard in 2012 have all seen their computer systems broken into. In most of these cases banking, credit card and debit card information, was stolen. But, with the US Government hack, it appears all sorts of personal information such as names, addresses, social-security numbers and more were targeted. (With that information the hackers can do a lot more damage to an individual than just run up some credit card bills.)
This well-deserved fear has led many investors into wondering how they can turn this bad situation into an investment opportunity. One could start by buying shares of cyber security software firms like FireEye, Palo Alto Networks, and Frontinet, or by buying the hardware manufacturers like Cisco Systems or Juniper Networks. But with that strategy the issue is correcting picking the right company or companies that will benefit the most from the increasing demand for cyber security.
That leads me to one option investors can now use to invest in the cyber security industry and not worry about whether there picking the wrong company or not. PureFunds ISE Cyber Security ETF (HACK) is the first and currently the only ETF giving investors the opportunity to buy into the Cybersecurity industry and not having to worry about whether they picked the "right" company or not. HACK is made up of 31 different firms that operate within the industry from both the software and hardware side of the business. All five of the companies mentioned above are part of HACK's holdings while its top holding consist of CyberArk Software, Infoblox, FireEye, Qualys, Proofpoint, Ahnlab, Fortinet, Palo Alto Networks, AVG Technologies, and Trend Micro Incorporation. The ten largest holdings make up 47% of the ETF's $860 million in assets.
HACK's began trading in November of last year, but is up more than 29% since then and up more than 22% year-to-date, easily outpacing the S&P 500.
The ETF carries an expense ratio of 0.75%, a little on the high side. But due to some of the more mature companies within the HACK portfolio, mainly the hardware manufacturers, the ETF also offers a 0.58% dividend yield, which helps offset the higher cost associated with the fund.
So while we all know there is a major threat to our personal information, investors may be wondering how big of an opportunity is this industry?
Today the cyber security industry sits at around $106 billion but is expected to grow to $170 billion by 2020. These figures were put together by research firm MarketsandMarkets. That represents a 9.8% compound annual growth rate of 9.8%. But, while this is impressive growth, I believe we could see the industry grow even larger, faster.
Now that the Federal Government has officially been hacked and lost vital personal information on millions of American's, we may begin to see the overall costs associated with a hack of this type. Until now we haven't fully understood the economic damage a hack of this magnitude will costs. But, while the situation is certainly terrible for those American's whom had their information stolen, the upside is that the industry can better assess the overall damage these hackers caused.
With that information, business's, governments, and individuals will know what another hack could cost them and therefore better understand how much they should be spending to better protect themselves. That figure could be both more than what they are currently spending, causing the industry as a whole to increase in value, thus pushing the stocks of cyber security company's higher, and making HACK ETF investors a fortune.
Regardless though of whether or not companies spend more than expected for cyber security, the expected 9.8% compounded returns over the next 5 years sound great to me, especially in an industry that really is just getting started.
Lastly, what I really like about the cyber industry is that high levels of security are always needed; regardless of the economic climate. To me very few industries are recession-proof, but while we don’t have good data on whether or not the market will still demand increasing levels of security during a recession, I would have to image they will and maybe even more so when world economies are struggling. Desperate times make people take desperate measures, and during a recession stealing someone's personal information seems like an easy way to make a buck, especially if you’re a laid-off computer programmer.
Disclosure: As of the publishing date, Matt Thalman is long JPMorgan Chase, Home Depot, Visa and MasterCard. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.