Trade idea - Strategic long cyber-security, ETF ticker = HACK

Uber was not the first - and it won't be the last. 2017 has seen an inordinate number of cybersecurity meltdowns (here's a list from Identity Force: 2017 Data Breaches - The Worst Breaches, So Far). And they weren't just your standard corporate breaches. There's been viral, state-sponsored ransomware, leaks of spy tools from US intelligence agencies, and full-on campaign hacking. And that's just the beginning.

With cyber attacks rising ever further up the list of reasons for fear, we have positioned for it by going long cyber-security stocks.

Since late Oct-17, we've been positioned strategically long the ETFMG Prime Cyber Security ETF (ticker is aptly named "HACK US Equity") when this author's favourite FT columnist - John Authers - mentioned about this ETF and wrote about emerging cyber-security concerns (21 Oct-17).

A poll of Sibos [conference] participants asked them what kept them awake at night the most. Nobody mentioned China, and only one per cent mentioned the euro (so this might be the time to short China and the eurozone). US politics perhaps predictably came first on 43 per cent; cyber crime was next at 33 per cent.

The numerous cyber crime events were packed out. Not surprisingly: according to Microsoft, some 70 per cent of businesses expect to be attacked this year. Speaker after speaker urged companies to practise "cyber hygiene" (which is a thing now, apparently). And the concern is that the securities industry, rather than the payments system, could become a prime target. Bond issuance and trading is being digitalised, and this creates more opportunities for fraud, such as selling fake bonds.

Valuation is fair: First, in terms of performance, cyber-security represents good value. In the chart below, year-to-date, cyber-security (red and green lines) has underperformed US Technology (blue, IYW) and - until very recently - the broader S&P 500 (black, SPY):

However, the least flattering are traditional performance/valuation metrics: For HACK, the Sharpe ratio = 0.7 (SPY = 3.1, IYW = 3.4) and PE = 230 for top ten holdings (SPY = 23.7, IYW = 24.3). Such dear asset valuations could make HACK vulnerable to a broader equity sell-off.



About HACK (30 Sep-17 factsheet):

  • Top ten holdings: Science Applications Inte 4.76% Cisco Systems Inc 4.70% Akamai Technologies Inc 4.66% Fireeye Inc 4.61% Juniper Networks Inc 4.60% Trend Micro Inc 4.57% Sophos Group Plc 4.56% Symantec Corp 4.56% Check Point Software Tech 4.45% Qualys Inctech 4.41%

An alternative to HACK is First Trust NASDAQ CEA Cybersecurity ETF (CIBR US Equity), which holds larger cap companies and - partly as a result - its PE is more attractive at 78 (27 Sep-17 factsheet):

  • Top ten holdings: VMware Inc (VMW) 6.65%, Cisco Systems Inc (CSCO) 6.52%, Palo Alto Networks Inc (PANW) 6.46%, NXP Semiconductors NV (NXPI) 5.85%, Symantec Corp (SYMC) 5.38%, Splunk Inc (SPLK) 3.58%, Trend Micro Inc (4704:TYO) 3.51%, Akamai Technologies Inc (AKAM) 3.39%, Cyberark Software Ltd (CYBR) 3.37%, Verisign Inc (VRSN)3.20%


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