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Cyber Security ETFs in Focus After Yahoo Hack Report

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Cyber security continues to be in the limelight as we approach the end of 2016 owing to numerous data breaches. While there were speculations of the Russian government resorting to hacks and sending contents to WikiLeaks to help Trump get to the White House, the biggest was probably Yahoo admitting to a high-profile data-security breach earlier this month (read: Tech ETFs Rebound: Can the Surge Continue?).

This was the second time that Yahoo found itself mired in a hacking scandal. Yahoo stated that it discovered a major cyber-attack wherein data from more than 1 billion of its customers could have been compromised in August 2013. This is touted to have been one of the largest cybersecurity breaches ever. In September, Yahoo reported a data breach affecting 500 million users during 2014. These could cast a shadow over Yahoo’s acquisition deal with Verizon Communications Inc. (VZ - Free Report) for $4.83 billion.

Such data breaches drive the need for cyber safety measures, thereby increasing demand for the services offered by security companies. Increased demand for security-related products act as tailwinds for ETFs like PureFunds ISE Cyber Security ETF (HACK - Free Report) and First Trust NASDAQ Cybersecurity ETF (CIBR - Free Report) . HACK and CIBR are up 4.9% and 12.2%, respectively, so far this year as of December 21, 2016 (read: Third Presidential Debate Puts These ETFs in Focus).

The cyber security market is growing rapidly owing to an increase in organizations adopting cyber security solutions. The cyber security market is expected to be worth $122.45 billion in 2016 and is expected to grow to $202.36 billion by 2021, as per a research report from Research and Markets. This implies an impressive compound annual growth rate (CAGR) of 10.6%.

As the industry is flourishing with ample growth potential in the years to come, many investors may want to jump into the space to tap the spending boom and growing demand for cyber security. In this light, HACK and CIBR will be in the spotlight (see all Technology ETFs here).

HACK in Focus

The fund offers exposure to those companies that ensure the safety of computer hardware, software, networks and fight against any sort of cyber malpractices. It tracks the ISE Cyber Security Index, holding 35 securities in its basket.

From an industrial look, software and programming accounts for nearly 60% of the portfolio while communication equipment, IT consulting and data services, and Internet mobile applications round off the next three spots. In terms of country exposure, U.S. firms take the top spot at 73%, followed by Israel (12%), the United Kingdom (6%), Japan (5%), South Korea (2%), the Netherlands (1%), and Finland (1%). The fund charges 75 bps in annual fees and sees volume of 205,000 shares a day on average. It has amassed about $751 million in its asset base (read: Pain Ahead for Cyber Security ETFs as Q3 Unfolds?).

CIBR in Focus

This ETF has accumulated nearly $130.1 million in its asset base and charges 60 bps in annual fees. It trades in a light average daily volume of around 38,000 shares. The fund follows the Nasdaq CTA Cybersecurity Index, which measures the performance of companies engaged in the cyber security segment of the technology and industrials sectors. In total, the product holds 33 stocks in its basket.

It is skewed toward the software industry at 48.9% while communications equipment rounds off the next spot with a double-digit allocation. Like HACK, American firms account for 73% of CIBR while the Netherlands, Israel, United Kingdom and others make up for a single-digit allocation.

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