Yahoo hack exposes potential for cyber security ETFs

Sep 28th, 2016 | By | Category: Equities

Yahoo has announced the hacking of some 500m names, email addresses and passwords – the largest corporate data breach in history.

Yahoo hack exposes potential for cyber security ETFs

Investors may gain access to the cyber security industry through ETFs offered by PureFunds, First Trust and ETF Securities.

The news not only highlights the growing scale of online security problems but also the potential for attractive returns, driven by growing industry demand, in cyber security exchange-traded funds.

According to Yahoo, the hack took place in 2014, affecting more than half of the company’s 1bn monthly users. The announcement comes as the company is finalising a deal to sell off its internet business to telecommunications giant Verizon for close to $5bn.

Around 200m Yahoo user records have been put on the black market over the summer, and an investigation into the hack by the FBI started in August, according to the Financial Times. Users’ financial information was not stolen, said Yahoo.

“This is one of the largest breaches in history. While it’s not on the same magnitude as [the hack on the US Office of Personnel Management], because of the nature of the data, it’s a watershed moment in security,” Kenneth White, a security researcher and director of the Open Crypto Audit Project, told the FT.

Details of the breach were confirmed shortly within weeks of the Democratic National Committee’s emails being hacked, exposing the Democrats’ attempt to smear former presidential candidate Bernie Sanders.

Other large-scale company security breaches include Dropbox, which announced earlier this month that 68m users’ accounts were compromised in 2012, representing two thirds of its customer base. Some 167m LinkedIn users’ account details were leaked the same year.

Sony Pictures Entertainment also suffered an attack with around 47,000 social security numbers of current and former employees leaked online, including those of actors and freelancers.

This year, around 37m users of Ashley Madison, a site to facilitate extramarital affairs, were hacked. More than 400m MySpace accounts were compromised in July, the second largest breach in history.

The size of the cyber security industry is estimated to grow to $202.3bn by 2021, according to research firm MarketsandMarkets. It was just $75bn at the end of 2015, said research company Gartner.

In light of a fast-growing industry, there are three ETFs that focus on the cyber security market.

The largest is the PureFunds ISE Cyber Security ETF (NYSE: HACK) which tracks the ISE Cyber Security Index. It mostly focuses on US-based companies (70%), with Israel as the second largest segment at 10%. Sub-industries include software (the largest segment at 59.7%), communications equipment (16.2%) and IT consulting and services (9.1%). It costs 0.75% in annual fees. HACK has grown to more than $800m assets since launch in late 2014 and has returned 7.5% returns so far this year in US dollar terms.

Another US-listed fund is the First Trust Nasdaq Cybersecurity ETF (Nasdaq: CIBR), which replicates the performance of the Nasdaq CTA Cybersecurity Index. The $100m fund costs 0.60% per year and has returned just over 10% year to date. It has similar sub-industries but a slightly lighter weighting in software at closer to 50%.

The third option is a Europe-listed fund from ETF Securities. The ETFS ISE Cyber Security GO UCITS ETF (LSE: USPY) tracks a slightly modified version of the index underpinning HACK. It has gathered $53m since inception one year ago and has returned 4.5% since 1 January in US dollar terms. A pound sterling-denominated version of the same fund (Ticker: ISPY) is listed on the London Stock Exchange. It has returned 18% over the same period due to the devaluation of the pound.

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