Cybersecurity ETFs Heating Up

Cybersecurity stocks are one of the big beneficiaries of the work-from-home theme that has marked 2020.

These companies providing the hardware, software and internet services needed to keep information secure were already riding a secular growth trend coming into this year—one that has been accelerated by the pandemic.

Demand for cloud-based cybersecurity protection and firewall services from companies as well as individuals this year have seen some of these stocks—and the ETFs that own them—rally sharply.

But like most niche segments, this one too has a number of funds offering slightly different takes on the theme, with different results.

Consider these ETFs from four different providers:

• ETFMG Prime Cyber Security ETF (HACK)
• First Trust NASDAQ Cybersecurity ETF (CIBR)
• iShares Cybersecurity and Tech ETF (IHAK)
• Global X Cybersecurity ETF (BUG)

Year to date, the performance disparity among these four ETFs is a wide 9 percentage points, as seen below:

Source: StockCharts.com

Comparing These ETFs

• The Veterans are HACK and CIBR

(You can compare the two portfolios side by side with our ETF Comparison Tool by entering the tickers at the top.)

In 2020, HACK has been the veteran underperformer of the year.

The fund may be the oldest among these ETFs, launched in 2014, but it has given up its first-to-market advantage, having now $1.4 billion in total assets—no longer the biggest ETF in this space.

HACK is a tiered, equal-weighted basket of cybersecurity companies and services. A look at the fund’s top holdings show that infrastructure- and web-security-focused Cloudflare (NET) is among the top names alongside Cisco Systems (CSCO), which is a conglomerate with a diversified line of business beyond cybersecurity. Cloudflare is up 114% year to date; Cisco is down 3.5%. Weighting schemes—equal weighting, in this case—can make a big difference in a year when companies’ returns are all over the map.

HACK focuses on either software/hardware producers or cybersecurity service providers, but those securities represent only about 88% of the portfolio, with the remainder taken by companies in aerospace and defense, communications and electronic equipment.

HACK still boasts nice liquidity, trading more than $7 million in average daily volume at relatively narrow spreads for the niche. But it has been largely shunned by investors this year, who have pulled about $156 million in net assets from the fund this year. This ETF has been the underperformer in this segment, and it has seen only one day of inflows since March 23.

HACK has 57 holdings, and costs 0.60% in expense ratio, or $60 per $10,000 invested.

CIBR is the broadly diversified investor favorite in 2020.

CIBR, launched almost a year after HACK, in 2015, for the same price tag of 0.60%, is today the biggest cybersecurity ETF, with $1.8 billion in total assets. Daily trading volume averages more than $14 million.

The ETF attempts to address the challenge of navigating a segment filled with small cap companies by weighting holdings by liquidity.

Like HACK, this isn’t a pure-play ETF either, and is even more diversified. The global-in-scope portfolio is almost 10% tied to communications companies; 10% tied to aerospace and defense as well as semiconductors; and it also owns some equipment names. Top holdings include CrowdStrike (CRWD), Splunk (SPLK) and Cisco.

The fund has not been a top performer year to date, but it has done really well since March 23, rallying some 48% between then and June 18. Investors have embraced this strategy, which is the asset-gathering winner in this race, taking in almost $500 million so far in 2020. The fund has seen only one day of outflows since March 23.

• The newcomers: IHAK vs. BUG

(You can compare the two portfolios side by side with our ETF Comparison Tool by entering the tickers at the top.)

IHAK is the vanilla, cheapest cybersecurity ETF.

IHAK, which came to market in 2019, is already a $67 million fund. The fund costs 0.47% in expense ratio—the cheapest price tag in this segment.

But this is a strategy without any bells and whistles. It’s a market-cap-weighted mix of primarily software/hardware companies and IT services (94% of the portfolio) across the globe involved in cybersecurity.

Top holdings include all the main players in this segment: companies like Zscaler (ZS), Fortinet (FTNT), Okta (OKTA), Palo Alto Networks (PANW) and CrowdStrike (CRWD). But at the top you’ll also find e-signature services-focused DocuSign (DOCU); infotech consulting firm Booz Allen Hamilton (BAH) and cloud services provider Akamai Tech (AKAM).

Together, these stocks have delivered double-digit—and some triple-digit—gains this year, making IHAK a standout performer in 2020, outpacing the veterans in this space as well as the Technology Select Sector SPDR Fund (XLK).

IHAK has not seen a single day of outflows in 2020—the fund has taken in about $55 million in new money.

BUG is the pure-play, smallest-tilting fund leading in performance in 2020.

This fund is new—not even one year old yet—and off to a strong start, delivering almost 20% in gains year to date, and 55% in gains since March 23.

BUG is a very small portfolio, with only 29 stocks and a weighted average market capitalization of just over $8 billion. For reference, an S&P 500 ETF has an average market cap of around $315 billion.

The fund screens securities by revenue, looking only for those that generate at least 50% of their cash from cybersecurity-related activities such as product development and services. That mix has worked.

That means top holdings in this portfolio include names such as Zscaler, up 144% this year; up 111% since March 23. Also here is Okta, up 71% in 2020; Fortinet up 27% this year and 60% since March 23; and CrowdStrike, which is up 100% YTD and up 105% since the March low.

BUG has managed to capture the “growthiest” names in cybersecurity in its narrow software-heavy portfolio, leading this segment of ETFs in performance this year. The fund has also yet to see a single day of outflows in 2020, picking up about $20 million this year.

(Use our stock finder tool to find an ETF’s allocation to a certain stock.)

Contact Cinthia Murphy at [email protected]