I think we can all agree that companies fighting cybercrime are important. No one wants to get hacked. But that raises the question: Is an exchange-traded fund comprised of 32 of the cybersecurity solution providers a good investment?
Cybersecurity is all over the news these days and examples of computer crime have badly hurt businesses, while exposing the personal information of millions of people. Earlier this year, Target Corp. (ticker: TGT) agreed to settle a class-action lawsuit for $10 million after a 2013 data breach. Last year, Sony Corp. (SNE) was victim of a hack that included employee email, details about employees’ families and salary information. U.S. intelligence officials blamed the hack on the North Korean government.
The PureFunds Cybersecurity ETF (HACK) is a new ETF that started late last year. HACK’s impressive statistics (as of June 30) include a six-month average return in net asset value of 19.32 percent, with a 26.09 percent return since inception in November. This ETF is beating the single-digit returns of the Standard & Poor’s 500 index by a wide margin.
Does this mean you should buy HACK?
It’s a funny thing about investing — there can be great companies, terrific concepts and wonderful ideas — but they don’t always translate into good investments.
What’s your investing plan? Before buying or selling any stock, bond, mutual fund or ETF, figure out an investment strategy. That includes knowing yourself, your risk tolerance and the time frame for the money. Only after you’ve done your initial due diligence should you consider buying specific investments.
What is HACK? HACK is a collection of companies involved in the cybersecurity industry. This ETF is considered a sector fund as its holdings are narrow and deal with a specific section of the market. In order for a company to be included in this ETF, it needs to fit into the fund administrators’ overall methodology.
The ETF includes some well-known names and other lesser-known firms including VeriSign Inc. (VRSN), Juniper Networks Inc. (JNPR), Cisco Systems Inc. (CSCO), FireEye Inc. (FEYE), and Radware Ltd. (RDWR). HACK contains companies from the U.S., Israel, Japan, South Korea and a few others. Its industry exposure spans system software, communications equipment and internet software.
HACK is somewhat diversified geographically and across several technology industries. As is the case with sector funds, overall there’s not a lot of diversification within this technology-related cybersecurity ETF.
Reasons not to invest in HACK. In general, sector funds are risky. They’re more volatile than well-diversified funds such as the S&P 500 ETF (SPY). They also may trade at a premium or discount to their underlying value. That means that the stocks within the ETF might be worth a certain amount, but HACK’s buy or sell price would be either higher or lower.
HACK is new and doesn’t have much of a track record. This means you don’t know how the group of companies have performed under previous market conditions, although the ambitious investor could investigate the individual stocks within the HACK ETF. This makes HACK riskier than other older sector funds.
HACK’s expense ratio of 0.75 percent means that in addition to the commission you pay when you buy or sell the ETF, there’s an annual $75 management fee for every $10,000 invested. That management fee is on the high side for ETFs.
Is HACK a candidate for your portfolio? Cybercrime is rampant. This fear of hacking is causing explosive share growth for HACK investors. After all, if the FBI can get compromised, is there help for the rest of us? HACK investors are betting that these companies will thrive in the current geopolitical climate rampant with cybercrime.
If you want to take a stab at profiting from online crime, investing in a sector fund such as HACK instead of an individual stock is a way to hedge your bet about which company will come out on top.
For investors who evaluate trends and attempt to profit from changes in the economic landscape, HACK may be a decent way to play the cybersecurity industry.
Investing caveat. Overall, much scientific investing research has shown that it’s quite difficult for investors to beat the returns of the overall market. Even those investors who succeed one year are unlikely to repeat their performance over time. That said, many investors enjoy the challenge of attempting to beat the market.
Additionally, there are casual investors who choose to speculate with a small portion of an otherwise conservative portfolio. So, if predicting trends and looking to outperform the markets is your style, then HACK may be worth a look. Unfortunately with its short track record, it’s difficult to perform a fundamental analysis and compare valuation ratios with historic trends for the ETF.
Finally, invest in HACK and sector funds with caution, and be prepared for a wild ride. Also, don’t overlook a cardinal rule of investing — if you pay too much for any security, then it’s a bad investment. So always pay attention to valuations when investing in the stock market.
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HACK ETF: Is It a Fad or the Real Deal? originally appeared on usnews.com
