Monday Money Tip: Stay away from cyber security funds

Hackers make good headlines, but they may not make for good investments.

After Sony's network was hacked recently, a new exchange-traded fund, PureFunds ISE Cyber Security ETF (symbol: HACK), saw its shares start to rise. The fund only launched in November and has traded from about $25 a share to $28 in recent days.

Funds like this capitalize on headlines about volatile sectors of the stock market. Like episodes of Law & Order, they have a ripped-from-the-headlines pitch that investors find intriguing.

But that doesn't mean such a fund is good for your pocketbook.

According to its prospectus, HACK seeks to replicate the performance of the ISE Cyber Security Index, which holds shares of 30 companies that make a business protecting cyber infrastructure. The fund's annual expense ratio is 0.75 percent, high for a vehicle whose holdings include companies that have not even made a profit yet.

"Some of these companies have lofty and perhaps hope-filled valuations to grow into, and some don't even have earnings at this point. It's an area that is a magnet for discussion, but maybe shouldn't be a magnet for capital just yet," says Thomas J. Raymond Jr., vice president in asset management for Abbot Downing, a division of Wells Fargo, in Center City.

FireEye (FEYE), one of the new HACK fund's top 10 holdings, has only recorded losses. Another holding, Fortinet (FTNT), trades at a heart-stopping price-to-earnings ratio of 173, compared with competitor Cisco Systems' (CSCO) 19 P/E ratio.

PureFunds, which launched HACK, doesn't have the greatest track record either. Other specialty funds it has floated out in recent years have liquidated, including MSXX and PureFunds ISE Diamond/Gemstone ETF (GEMS). GEMS was an exchange-traded fund tracking the global diamond/gemstone industry.

How do these headline-inspired funds come into being? They are "white label" ETFs, for which documents are filed with regulators using another firm to speed up the process of coming to market.

In this case, PureFunds, an independent ETF research house based in Mendham, N.J., put together HACK with Exchange Traded Managers Group, a private-label issuer firm in Summit, N.J., run by Sam Masucci, the chief executive officer.

Masucci did not return phone calls to his offices asking for comment about what happened to the now-liquidated funds or about the new HACK fund.

As of Oct. 30, HACK's index had 30 constituents, six of which were foreign companies; three largest stocks were VASCO Data Security International Inc. (8.57 percent of the fund), Imperva Inc. (6.08 percent), and Palo Alto Networks Inc. (5.49 percent).

Avoid investing because of headlines. If you want exposure to cybersecurity, you can buy the individual companies in the index. Don't pay for ETFs that may not be around in a few years.