As the tech-driven Nasdaq continues its strong 2015 run, already up nearly 9% YTD, one particular sector continues to make headlines for its huge gains: cyber security. Thanks to newsworthy security breaches of celebrities (Kate Upton), corporations, and most recently, the U.S. government, cyber security stocks are on a momentous rise. Moreover, given data breach incidents are already up 25% Y/Y, and that the "Internet of Everything (IoE)” is growing at a ridiculous rate, the cyber security sector should prove an attractive investment opportunity for years to come.
The entire cyber security sector is up more than 25% YTD, as reflected by the performance of the PureFunds ISE Cyber Security ETF (HACK) – the first and (currently) only cyber security ETF. After only seven months of existence, HACK has already surpassed $1B in assets. The ETF added more than $200M in assets during June alone, highlighting Wall Street’s newfound cyber security interest. The fund’s portfolio is currently comprised of 31 companies, including the sector's biggest names in Palo Alto Network (PANW) and FireEye (FEYE), among others.
Palo Alto Networks and FireEye have a combined market capitalization of over $23.5B, with Palo Alto Networks valued at $15.3B and FireEye valued at $8.5B. Both companies offer unique services that test malware in secure digital environments and identify potentially harmful threats. As such, they then create programs that can block foreign breaches. These systems differ from traditional cyber security services offered by companies like Symantec (SYMC) because they detect and defeat both known and unknown threats. Comparatively, Symantec’s Norton AntiVirus only protects systems from known malware, seeking to contain viruses and minimize their impact.
Because of Symantec's retroactive approach, both Palo Alto Networks and FireEye have yielded significant gains this year. Palo Alto Networks is up nearly 50% YTD, whereas FireEye is up more than 70% YTD. However, between the two firms, Palo Alto Networks will likely provide the best long-term returns. Not only does the company have a comparative advantage over FireEye, but Palo Alto Networks also offers a more diverse portfolio of cyber security services. While FireEye’s revenue is based upon its single adaptive security service, Palo Alto Networks offers a similar product in conjunction with an overarching security software suite. Thus, companies are inclined to choose Palo Alto Networks' comprehensive cyber security package.
Although it may not offer the same high-growth prospects as individual stocks, the PureFunds ISE Cyber Security ETF may very well be the best way to invest in the rapidly growing cyber security sector. Not only does the ETF minimize risk, compared to individual securities trading, but HACK also exposes investors to a vast array of systems and services that address unique cyber security market demands.