This ETF Hacks Into Cyber-Security Spending

The battle against hackers just got real.

After high-profile cyber-attacks and breaches that stretch from Sony Pictures Entertainment to JPMorgan Chase & Co. to Jennifer Lawrence, everyone is thinking about cyber-security. Even before the debacle with Sony, investing in cyber-security was projected to jump 40 percent to $42 billion by 2017, according to Bloomberg Intelligence. And yes, there’s now an exchange-traded fund to play it.

The Purefunds ISE Cyber Security ETF (HACK ), out for less than a month, is already one of the most successful launches of 2014. It has returned 5.3 percent in its first three weeks, compared to 1.3 percent for the S&P 500 Index. HACK's $65 million in assets puts it in the top 15 percent of the 196 new launches. That's especially noteworthy because the ETF comes from a tiny, relatively unknown issuer without a ton of marketing power.

HACK tracks 26 companies involved in providing cyber-security software, hardware and services. About 85 percent of the stocks are based in the U.S. About half of the portfolio's stocks are small-cap companies, so investors can expect about double the volatility of the S&P 500.

The top holding: Vasco Data Security International, Inc. (VDSI ), which provides network and data verification services to financial institutions. The stock is up 253 percent this year. Another big holding is Palo Alto Networks, Inc. (PANW ). Its business is providing firewalls that identify and control applications, and that scan content to stop threats and prevent data leakage. PANW is up 115 percent so far this year.

When using niche products like HACK it's important to check if the portfolio companies are already available in bigger, more mainstream ETFs. HACK has only a four percent overlap with the Technology Select Sector SPDR Fund (XLK ), the world’s most-owned tech ETF. Almost all that overlap comes from Cisco Systems Inc. (CSCO ). It has less than a one percent overlap with S&P 500 Index.

In short, most investors don’t have any exposure to this fledgling industry. While HACK (expense ratio: 0.75 percent) has already had a nice run, it provides targeted exposure to a hot industry for those who can handle the volatility.

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Eric Balchunas is an exchange-traded-fund analyst at Bloomberg. More ETF data is available here; weekly ETF podcasts can be found here.