HACK: This May Not Be The Pure Play Cybersecurity ETF You're Looking For

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The HACK ETF invests in companies involved in cybersecurity.The fund includes several stocks that are not traditionally recognized as cybersecurity names which adds diversification but also limits its...

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Data by YChartsWhat is the HACK ETF?","collect":0,"end_time":0,"defaultTopTitle":"seekingalpha.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"IE00B19Z8W00.USD":"FTGF CLEARBRIDGE US LARGE CAP GROWTH \"A\" INC","IE00BKVL7J92.USD":"Legg Mason ClearBridge - US Equity Sustainability Leaders A Acc USD","LU0127658192.USD":"EASTSPRING INVESTMENTS GLOBAL TECHNOLOGY \"A\" (USD) ACC","NOC":"诺斯罗普格鲁曼","LU0203345920.USD":"SCHRODER ISF QEP GLB ACT. 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South_agency/E+ via Getty ImagesThe Amplify Cybersecurity ETF (NYSEARCA:HACK) tracks a basket of companies developing solutions to safeguard sensitive data, networks, and systems. We covered HACK in an article way back in 2019 highlighting the fund as a good option to gain exposure to the high-level secular growth themes driving cybersecurity innovation. Shareholders have captured an 82% return in the past five years, modestly underperforming the S&P 500 Index (SP500) performance over the period. Favorably, the fund is currently at an all-time high. On the other hand, a lot has changed including HACK switching fund sponsors earlier this year along with several new cybersecurity leaders gaining industry prominence. Our update today notes that HACK has a relatively unique strategy compared to alternative cybersecurity ETFs in the market by including a more diverse group of stocks including semiconductor companies and broader network infrastructure names. There are some pros and cons to this direction. Could HACK make a good addition to your portfolio now? Here's what you need to know. Data by YChartsWhat is the HACK ETF? The HACK ETF is intended to passively track the \"Nasdaq ISE Cyber Security Select Index\". According to the methodology, starting with a minimum market capitalization of $1 billion, companies that generate at least 90% of their revenues from cyber security are included. The index also considers companies that generate significant cybersecurity-related revenue relative to the aggregate value of the index market capitalization. This criteria provides flexibility to include large companies that are not necessarily \"cybersecurity names\" as long as they have a key product or service targeting the space. Finally, there is a quarterly rebalancing and reconstitution with each stock position based on a free-float adjusted weighting. In a relatively concentrated portfolio across 26 stocks, Broadcom, Inc. (AVGO) is the current larger position with a 10.0% weighting. This is followed by Cisco Systems, Inc. (CSCO) at 7% and Palo Alto Networks, Inc. (PANW) at 6.5%. Down the list, high-profile cybersecurity leaders such as Fortinet, Inc. (FTNT), CrowdStrike Holdings, Inc. (CRWD), and Zscaler, Inc. (ZS) are included among top 10 holdings. All corners of the cybersecurity landscape covering categories like network, application, cloud, access management, endpoint, and infrastructure security are represented. source: Amplify ETFWhat may be a surprise to some is Northrop Grumman Corp. (NOC) and General Dynamics Corp. (GD), recognized as aerospace and defense sector leaders, together contribute approximately 11% of the total fund weighting. In this case, national security and defense contractors are increasingly integrating cybersecurity applications as part of their offerings seen as the next frontier in warfare. Overall, we find that HACK has a diversified profile within the theme, which has the advantage of spreading out the risk but can also be criticized for its particular portfolio structure for not being focused enough. source: Amplify FundsIs HACK a Good Cybersecurity ETF? The good news is that HACK has returned 12% in 2024, leading the pack among comparable ETFs like the iShares Cybersecurity and Tech ETF (IHAK), First Trust NASDAQ Cybersecurity ETF (CIBR), and the Global X Cybersecurity ETF (BUG) with an average return closer to 8%. Data by YChartsAt the portfolio level, it's likely HACK's positioning in shares of Broadcom as its largest holding played a key role in the outperformance considering the stock is up more than 44% year-to-date. As mentioned, HACK takes a more liberal interpretation of the cybersecurity theme which has been to its benefit this year, while the more traditional software and cloud-based cybersecurity leaders have been more volatile. That dynamic is evident when we look at top holdings from the various funds. Data by YChartsThe problem we have with HACK is that while Broadcom does indeed offer cybersecurity through its infrastructure software segment, its core competency is on the side of semiconductor solutions focusing on network and connectivity. The same argument can be made for Cisco Systems where we don't necessarily consider the company to be a bellwether for the cybersecurity theme. The controversy with including defense sector stocks like Northrop Grumman and General Dynamics is that their operating and financial performance is more exposed to their aeronautics and weapons systems compared to the peripheral cybersecurity initiatives. If anything these stocks should have a lower weighting within the underlying index and fund, making room for what we would consider to be \"pure plays\" on the theme through cybersecurity leaders like Palo Alto Networks or Zscaler to play a bigger role. By this measure, the BUG or IHAK ETF may do a better job targeting the trends in cybersecurity while HACK gets muddled by trying to do too much. We can't say one fund will definitively over or underperform in a particular period, but the point here is that investors need to know what they're getting.   Seeking AlphaWhat's Next for the HACK ETF? We rate HACK as a hold implying a neutral view on the price direction which should simply perform alongside the market. The expectation is that as the demand for cybersecurity solutions grows globally, the leading companies will continue to capitalize on that opportunity through earnings momentum. HACK is well-positioned to deliver positive shareholder returns. At the same time, we believe investors would be better suited to seeking an alternative vehicle within this market segment. A fund that is more concentrated in companies entirely focused on cybersecurity allows the theme to differentiate itself from traditional technology sector strategies while complementing a more diversified portfolio.  In terms of risks, headline-making vulnerability failures or IT outages such as the recent episode with CrowdStrike where its network went offline during an infrastructure update highlight the sensitive nature of the industry. Rapidly changing technologies mean some companies will gain at the expense of competitors. A deterioration in the global macro backdrop would likely also introduce volatility into the fund.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2462451759"}