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The Best Way to Invest in Cybersecurity Stocks

I recently appeared on Fox Business to talk about the high-profile Office of Personnel Management hack, in which the perpetrators got access to the personal info of top-level federal employees, plus the info of their friends and family.

Cybersecurity, avoiding hackers

While the initial report was concerning enough, it has since come out that the hack was around four times worse than originally announced, with nearly 20 million affected.

This high-profile government hack comes on the heels of a similarly concerning situation with health care provider Anthem (WLP) earlier this year, in which almost 80 million people had account information stolen.

On Fox Business, the panel and I agreed that President Obama and the government need to take a more proactive approach to cybersecurity to prevent this type of breach in the future. Of course, the same holds true beyond government. The list of security breaches — from Target (TGT) a couple of years ago to the Houston Astros recently — just seems to keep growing.

With cybersecurity in the spotlight once again, I believe stocks offering protective services and technology are definitely worth a look from an investment perspective. They say fear is more powerful than greed, and there’s a good chance that fear — and legitimate fear at that — will keep driving cybersecurity stocks higher.

The Best Cybersecurity Play Right Now

As with a lot of tech sub-sectors, the cybersecurity space is incredibly crowded and the products can be incredibly complicated. For that reason, the PureFunds ISE Cyber Security ETF (HACK) is a great place to start if you want to play this area without having to dig into the prospects of every individual cybersecurity company.

In fact, the fund’s description nods to the exact mega-trend and mega-impact I have already outlined, explaining:

“Hundreds of millions of people around the world have suffered from some form of cyber attack. Although a personal cyber attack can seem overwhelming and significant, those that happen on a corporate or government level can be disastrous. In addition to financial losses, cyber attacks have the ability to shut down or manipulate energy infrastructure, weapons defense systems, medical devices, financial markets, transportation networks/vehicles, or harvest highly personal or secret information and a constantly growing amount of other potential threats.”

It’s almost no wonder, then, that HACK was launched less than a year ago and is already worth almost $1.3 billion on gains of 26% since inception.

Proofpoint (PFPT), Imperva (IMPV), Intralinks (IL), Palo Alto Networks (PANW) and Splunk (SPLK) make up the top five holdings and just over 20% of the fund. All in all, the fund has 32 holdings, although that also includes some legacy tech vendors that aren’t 100% focused on cybersecurity, like Cisco (CSCO).

But I like that those big names are in there as well, especially considering the level of consolidation in the tech world right now. Cisco, for instance, has been on an acquisition spree and could continue buying security startups to beef up its focus and work toward the goal of being a one-stop IT shop.

The HACK fund actually ran up a little too fast in the wake of the OPM news, and shares have subsequently cooled off in recent weeks. While that cool-off might seem like weakness, I see it as an opportunity to establish a position in this long-term trend.

Cybersecurity simply isn’t going anywhere; it’s not a line item companies or the government can afford to cut even if the broader economy slows, and its importance will likely keep growing as awareness and fear does.

Hilary Kramer is the editor of GameChangers and Breakout Stocks Under $10.

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