Investing in Cybersecurity ETFs

Markets Motley Fool

As the world becomes ever more reliant on the internet and software systems, the need for cybersecurity to protect that infrastructure increases. For those interested in investing in the fast-growing industry, the Vanguard Information Technology ETF (NYSEMKT: VGT), PureFunds ISE Cyber Security ETF (NYSEMKT: HACK), or First Trust Nasdaq Cybersecurity ETF (NASDAQ: CIBR) could be the ticket.

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Apples to apples to oranges: Anti-hacker index funds

PureFunds' HACK and First Trust's CIBR cybersecurity ETFs are relative newcomers in the investment world, both having launched within the last few years. Due in large part to the frequency and high-profile hacking incidents in recent years, both funds have attracted significant investment in their short history. However, they still lag behind the much-older Vanguard technology ETF in both size and total cost. 

Metric

VGT

HACK

CIBR

Inception date

Jan. 26, 2004

Nov. 12, 2014

July 6, 2015

Fund total net assets

$14.1 billion

$1.1 billion

$259.7 million

Expense ratio

0.1%

0.6%

0.6%

Fund composition

VGT has 365 stocks spanning the entire U.S. technology industry; holdings are weighted by market cap (the bigger the company, the larger the percentage of the fund); and the fund is passively managed.

HACK has 35 cybersecurity-specific holdings; companies must have a market cap of $100 million to be included, and the stocks are rebalanced quarterly.

CIBR has 30 cybersecurity-specific holdings; each company must have a market cap of $250 million to be included, and the stocks are rebalanced quarterly.

Technology stocks are having a great 2017, as indicated by Vanguard's technology ETF. Cybersecurity companies have done well also, but the industry is still evolving and has had a few downturns this year, so it has underperformed the broader sector.

Since the beginning of the year, PureFunds ISE Cyber Security ETF has outperformed First Trust Nasdaq Cybersecurity ETF. It is worth noting, though, that performance dating back to the earliest possible comparison (or 2015, when First Trust's offering, CIBR, launched) favors CIBR by a significant margin.

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What's causing the difference? There are a number of factors. For instance, HACK's portfolio includes smaller companies, and CIBR typically exhibits less volatility (in other words, the fund is down less on bad days than HACK is). At the end of the day, though, there is not much history behind either ETF, and with cybersecurity still a young industry, chances are good that the performance of the two funds will be similar over time.

The best way to play

The underlying stock portfolios of each cybersecurity fund are similar in many ways, but there are important differences. More specifically, CIBR favors bigger companies, and more of the fund's assets are concentrated in those top companies. To illustrate, here are the top five holdings of each, as of this writing: 

HACK Top Five Holdings

Market Cap / % of Portfolio

CIBR Top Five Holdings

Market Cap / % of Portfolio

Palo Alto Networks

$12.1 billion / 4.2%

Palo Alto Networks

$12.1 billion / 6.8%

Akamai Technologies

$8.4 billion / 3.9%

Akamai Technologies

$8.4 billion / 6.3%

Gigamon

$1.4 billion / 3.9%

Cisco Systems

$159.6 billion / 6.1%

Proofpoint

$3.7 billion / 3.8%

Juniper Networks

$11.0 billion / 6%

Barracuda Networks

$1.2 billion / 3.8%

Symantec

$17.4 billion / 5.7%

If you're looking for a little extra growth potential from the industry, HACK might be the place to start with its inclusion of smaller companies in the top of the list. CIBR will also benefit from growth in cybersecurity, but the favoring of big companies could help lower the ups and downs.

The other option -- for investors who prefer a hands-off approach and don't appreciate the extra excitement -- is to buy the whole U.S. tech sector with the Vanguard fund and call it good.

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Nicholas Rossolillo has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Palo Alto Networks. The Motley Fool has a disclosure policy.