Wednesday 24 June 2015

Cybersecurity ETF: Lessons From A Success (And Failures)

T wo misses and a middling success. That’s what it took for Andrew Chanin to launch a blockbuster new ETF.PureFunds ISE Cyber Security ( HACK ) recently crossed $1 billion in assets, roughly seven months after its debut.

The niche exchange traded fund partly lucked out — a high-profile security breach atSony (SNE) occurred not long after its Nov. 12 launch. Since then, a slew of online data thefts have kept hackers in the news and made cybersecurity stocks a hot pick for successful investing .

IBD Leaderboard stockPalo Alto Networks (PANW ) is up roughly 130% in the past year. Sector LeadersVasco Data Security ( VDSI ) andCyberArk Software ( CYBR ), an IPO , rocketed about 50% each in the past three months.

Chanin, CEO of PureFunds, says HACK filled an unmet need in the ETF marketplace.

“It spoke very loudly” to investors, he said, “whether they think there could be more cyberattacks in the short term or maybe own much broader technology exposure but want a tactical tilt towards cybersecurity or believe there’s going to be so much spending by corporates and government entities.”

HACK now holds $1.1 billion in assets, with almost half its assets in the top 10 of 31 stock holdings. It skews toward smaller caps valued at $2.68 billion on average.

That makes it a risky bet in a volatile industry segment. Its 0.75% expense ratio is relatively steep, but in line with peers focused on specific themes.

New Jersey-based PureFunds’ first two ETFs — targeting gemstone and mining stocks — failed to attract investors and shut down. Its third try,PureFunds ISE Junior Silver (SILJ), holds $4.9 million.

Launching A New ETF

One key lesson they taught Chanin was that “just because you launch an ETF doesn’t mean every investor is going to be able to invest in it.” He describes this as a common — but erroneous — assumption among rookies in the business.

Chanin, 29 years old, found major ETF platforms have gatekeepers who decide whether a product gets approved. Their rules or milestones for granting approval were murky to him as an outsider.

What’s the solution? None really, says Chanin: “Having a track record helps.” But that’s just what rookie ETF providers don’t have. So Chanin suggests “having clients and colleagues show that they are interested (in the ETF ) by reaching out to platform gatekeepers.”

Persistence paid off for Chanin: “Had we not been willing to take on risks, we would not be where we are today.”

He didn’t hesitate to shut down ETFs that weren’t gaining assets. “We saw that as a business decision,” he said. “So many people are scared it will show you don’t have what it takes to succeed.”

But he made sure to do right by stakeholders — by being transparent about the decision and process, as well as giving back as much of the investments’ net asset value as possible to them.

“Investors didn’t end up with zero” when the ETFs liquidated, Chanin said. “It didn’t hurt our brand or our reputation.”

HACK’s success, and its siblings’ failures, showed Chanin that “timing is very important to the success of an ETF.” How does one determine the opportune time? “You won’t know until you launch it,” Chanin conceded. But it can be critical to have a first-mover advantage: “I got into ETFs with the mindset of being first to market.”

HACK gained 0.3% on the stock market today. It’s up 27% year to date.

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