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HACK Vs. CIBR: With Cybersecurity Stocks Rolling Again, Which ETF Is The Better Choice?


After correcting significantly in the second half of 2015, cybersecurity stocks have rebounded more than 40% from February 2016 lows.

The PureFunds ISE Cybersecurity ETF and the First Trust Nasdaq Cybersecurity ETF are the two fund options for investors in this space.

In this article, I'll examine the funds' index construction, portfolio composition, expense ratios and liquidity to determine which fund makes a better investment.

In 2014, cybersecurity stocks were all the rage. With every big data breach that hit the news from companies like Target (NYSE:TGT), Home Depot (NYSE:HD), Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), the stocks of companies that provided threat detection software and services became more and more valuable. FireEye (NASDAQ:FEYE) jumped more than 130% in the first quarter of 2014 alone at its peak. From the beginning of 2014 through the middle of 2015, Fortinet (NASDAQ:FTNT) more than doubled. Palo Alto Networks (NYSE:PANW) more than tripled.

The combination of high valuations, increased cash flow burn and lack of profits knocked many cybersecurity stocks back down to earth. The consolidation of the sector will likely continue for the foreseeable future making picking individual companies a real challenge. Investors are likely better off buying one of the ETFs that focus on the industry - the PureFunds ISE Cybersecurity ETF (NYSEARCA:HACK) or the First Trust Nasdaq Cybersecurity ETF (NASDAQ:CIBR).

PureFunds had the benefit of first arrival and hit the market while the sector was still hot. Assets quickly grew to more than $1 billion making it one of the more successful ETF launches in recent memory. Despite the cybersecurity sector cooling off, the fund still has about $750 million in assets.

First Trust on the other hand debuted at the end of the boom. Seven months following its inception, the fund was down more than 20%. It's rebounded nicely since then but remains a distant second to PureFunds with $100 million in assets under management.

With correlations between the two funds very high (95% according to correlation matrices here and here), investors may assume that they are essentially interchangeable. While the two...