Adding Some Volatility To The Cybersecurity ETF Trade

The PureFunds ISE Cyber Security ETF (NYSE:HACK), the kingpin of cybersecurity exchange-traded funds, has, as of this writing, lost more than 5 percent since November 4. This coincides with the retreat of previously darling cyber security stocks, such as FireEye Inc (NASDAQ:FEYE) and CyberArk Software Ltd (NASDAQ:CYBR).

That does not mean the long-term bull thesis for HACK, which this week celebrated its first anniversary, is damaged. In fact, the recent bloodletting in the cybersecurity space could open the door for what has long been perceived as a looming catalyst for HACK and its constituents: increased mergers and acquisitions activity.

The Cybersecurity Space

Of course, more cybersecurity mergers and acquisitions would put the spotlight on HACK, a place the nearly $1.1 billion ETF feels comfortable. A pickup in cybersecurity deal-making also has the potential to spark interest in HACK's new, leveraged equivalents, the Direxion Daily Cyber Security Bull 2X Shares (NYSE:HAKK) and the Direxion Daily Cyber Security Bear 2X Shares (NYSE:HAKD).

Potential Moves

A recent 24/7 Wall Street article highlights CyberArk, FireEye and Fortinet Inc (NASDAQ:FTNT) as potential takeover targets in the cybersecurity space. Those three stocks combine for over 8 percent of HACK's weight.

Takeovers of any or all of those companies, particularly at large premiums, would likely elicit sharp rallies for HACK, in turn doing the same for HAKK. HAKK attempts to deliver twice the daily performance of the ISE Cyber Security Index. That is the same index HACK follows.

The Index And The Funds

Currently, there are over 1.5 billion social network users worldwide with more than 60 percent of users accessing social media services via smart phones. Social networking is one of the most popular ways for online users to spend their time, and a preferred way to stay in contact with friends and families. This is one of the top reasons why hackers target social media networks. Users are likely to click links they think are posted by friends, which hackers use to their advantage, noted Direxion.

More recently, the cybersecurity trade of the moment has been HAKD, which seeks to deliver double the daily inverse performance of HACK's underlying index. HAKD has climbed nearly nine percent since November 4, and traders are displaying increased interest in the leveraged bearish cybersecurity ETF.

For the five-day period ending November 12, HAKD's volume was more than 231 percent above the ETF's trailing 20-day average, a number surpassed by just four other Direxion leveraged funds, according to issuer data.

Image Credit: Public Domain