3 Key Differences Between CIBR & HACK

The brand new First Trust Nasdaq CEA Cybersecurity ETF (CIBR) is hoping to capitalize on the hot theme of cybersecurity, and challenge the hugely popular PureFunds ISE Cyber Security ETF (HACK | C-23) by relying on First Trust’s stature in the ETF space. The firm has also built a cheaper-than-HACK portfolio.

HACK, which until this week was a one-of-a-kind ETF, has been hugely popular with investors, gathering more than $1.2 billion in assets since it came to market last November. The seven-month history of the fund suggests that with every news of data breaches and cybersecurity threats around the globe, demand for HACK rises.

Banking On Name Recognition

But now, First Trust, the sixth-largest ETF issuer—with $43.4 billion in assets—wants a piece of that action. While overcoming first-to-market advantage such as the one HACK enjoys isn’t easy, First Trust is counting on its more recognizable name brand and more established presence in the ETF space to help its new fund, CIBR, get traction.

Beyond that, First Trust is also hoping that a 20 percent cheaper expense ratio—plus a portfolio comprising more liquid underlying holdings—will help attract investor dollars to its second-to-market strategy.

At the end of the day, CIBR and HACK aren’t all that different in the exposure they offer, but there are three key distinctions worth noting:

Focus On Liquidity

CIBR is keen on emphasizing liquidity—something that isn’t always a given in a universe of companies that are often small and young. As HACK grows, lack of underlying liquidity in some of its holdings could become a problem if the ETF owns more and more of a company’s outstanding float.

CIBR requires its stocks have a minimum three-month average daily dollar trading volume of $1 million, according to First Trust. They also have to have a minimum free float of 20 percent and market capitalization of at least $250 million.

By comparison, companies included in HACK must have a minimum market cap of $100 million. The index methodology doesn’t specify a liquidity threshold, although HACK’s index provider—ISE—often uses the same $1 million figure as a parameter.

What’s key here is that ISE’s semi-qualitative/semi-quantitative approach to liquidity does not involve establishing a cutoff when it comes to a company’s required free float.

To investors, that distinction means HACK is more likely to own smaller, up-and-coming companies that could be on the leading edge of technology breakthroughs, but that have yet to establish much of a track record. It’s pure exposure to anti-hacker stocks. Average daily trading does play a role in the weighting of each security, according to ISE.

Being Cheaper Doesn’t Hurt

Another key difference between the two ETFs is cost. CIBR came to market with an expense ratio of 60 basis points, or $60 per $10,000 invested. HACK charges a 75 bp expense ratio, or about 20 percent more than CIBR. That cost difference will have to be made up in total returns.

Since its inception, HACK has traded with an average spread of 8 bps, meaning investors are shelling out about $83 per $10,000 invested to own it, which is the expense ration and the spread together. Time will tell how tight spreads in CIBR—which launched Tuesday—are.

Similar Holdings, Different Weights

Both funds have similar holdings, focusing on companies that develop cybersecurity technologies, implement them and provide services, but they apply different weighting schemes.

CIBR tracks the Nasdaq CEA Cybersecurity Index^SM, which focuses on companies engaged in the cybersecurity segment of the technology and industrials sectors. The index uses a modified liquidity weighted methodology that includes caps on allocations to individual stocks, according to First Trust.

CIBR’s biggest holdings are led by an American depositary receipt—Qihoo 360 Technology—at about 6.8 percent of the portfolio. Other top holdings include FireEye at 6.2 percent, Palo Alto Networks at 6.1 percent and Cisco Systems at 5.6 percent.

In all, the 33-holdings fund is 48 percent allocated to software firms, 20 percent to communications equipment companies and 10 percent to IT services. CIBR’s median market cap is $6.8 billion.

HACK, meanwhile, tracks the ISE Cyber Security Index, and applies a modified tiered equal-weighting methodology that spreads allocations evenly among its 31 holdings.

Top holdings include IntraLinks Holdings, at 4.4 percent, Proofpoint, Science Applications and Imperva—each at 4.3 percent—and Fortinet at 4.1 percent. Cisco Systems represents 4.0 percent of the portfolio.

HACK has a heavier tilt toward software names, which represent roughly 60 percent of the overall mix. Communications equipment companies clock in at about 16 percent, while IT services represents about 5 percent of the portfolio. The average market cap is $7.9 billion.