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Summary HACK is the more expensive fund, with greater liquidity and more of a pure play portfolio. CIBR is the cheaper fund with greater exposure to larger companies, resulting in slightly less volatility. HACK and CIBR have proven to be considerably more volatile than the broader technology sector. High-profile data breaches have affected companies like Ashley Madison, Sony (NYSE: SNE ), Starbucks (NASDAQ: SBUX ) and Target (NYSE: TGT ). There have also been reports of cyberattacks against government agencies, including the Department of Defense. Organizations around the world are stepping up their efforts to update their protocols and technology to restrict unauthorized intrusions and the theft of sensitive information. As a result, analysts expect spending on cybersecurity to be a growing line item for all manner of organizations. This has led to increased interest in cybersecurity-related stocks and in 2015, cybersecurity stocks had produced some of the market’s best year-to-date returns before the August sell-off. Rather than trying to single out individual firms, two exchange-traded funds, the PureFunds ISE Cyber Security ETF (NYSEARCA: HACK ) and the First Trust Nasdaq CEA Cybersecurity ETF (NASDAQ: CIBR ), offer investors broad exposure and diversification across this niche in the information technology industry. PureFunds ISE Cyber Security Established in November 2014, HACK was the first ETF created to track the cybersecurity industry. The fund’s goal is to provide investment returns that generally correspond to those of the ISE Cyber Security Index before fees and expenses. The index tracks the performance of domestic and international companies that provide cybersecurity or for which cybersecurity is a key driver in their overall business model. The $1.29 billion fund has a 71.5 percent exposure to domestic stocks and a 28.5 percent allocation to foreign securities, mainly Greater Europe and the Middle East. The fund’s largest exposure is to mid-, small- and micro-cap companies. First Trust Nasdaq CEA Cybersecurity The First Trust Nasdaq CEA Cybersecurity ETF began trading on July 7, 2015. CIBR seeks to replicate the performance, before fees and expenses, of the Nasdaq CEA Cybersecurity Index. The benchmark index includes common stocks and depository receipts of companies classified as engaging in cybersecurity according to the Consumer Electronics Association (CEA). The fund intends to hold a position in each security contained within the index. CIBR has a 28 percent allocation to large cap stock as well as a 38 percent allocation to mid-cap and 22 percent exposure to small-cap stocks. CIBR has a 67 percent exposure to domestic securities and a 33 percent exposure to foreign issues, mainly the United Kingdom, the Middle East and Emerging Asia. Fund Differences Although the funds have similar goals, there are differences between the two ETFs. These subtle nuances may result in one fund, rather than the other, being more suitable for your individual portfolio. The first difference is the construction of their underlying benchmark indices. HACK utilizes the ISE Cyber Security Index as its benchmark. This index focuses on companies that develop hardware and software for safeguarding networks, websites and files. CIBR tracks the Nasdaq CEA Cybersecurity Index, which includes companies engaged in building, implementing and managing security protocols for public and private networks, computers and mobile devices. While the indices are similar, they differ in the size of the companies held within the portfolio, their market liquidity and the manner in which the index is weighted. CIBR has a market cap minimum of $250 million and an average three-month trading volume of $1 million. HACK lowers the market cap requirement to $100 million and does not have a trading minimum. While the ISE Cyber Security Index of HACK uses a modified equal weighting methodology, the Nasdaq CEA Cybersecurity Index backing CIBR utilizes a modified liquidity-weighted technique. The result of these differences is HACK has more assets in smaller companies that are more easily categorized as pure plays in the industry. This focus creates the potential for higher volatility and risk associated with owning small and micro-cap stocks. A second difference is portfolio composition. The top five holdings for HACK are Fortinet (NASDAQ: FTNT ), Imperva (NYSE: IMPV ), Trend Micro ( OTCPK:TMICY ), Proofpoint (NASDAQ: PFPT ) and Juniper Networks (NYSE: JNPR ). CIBR’s top holdings include Qihoo 360 (NYSE: QIHU ), Palo Alto Networks (NYSE: PANW ), Cisco (NASDAQ: CSCO ), FireEye (NASDAQ: FEYE ) and NXP Semiconductors (NASDAQ: NXPI ). With a heavier tilt towards software names, HACK is more of a pure play. Overall, HACK has a little over 10 percent of its portfolio in stocks not held in CIBR, while CIBR has about a third of its holdings in stocks not held by HACK. Beyond owning a more differentiated portfolio, CIBR is a bit more diversified since it has more individual holdings within its portfolio. Due to the size of the industry and the companies available for investment, both funds also hold some large caps to fill out their portfolios. As a result, both funds hold large caps such as Cisco Systems and Juniper Networks that are not pure plays on cybersecurity. CIBR doesn’t have a long history and has tracked closely with HACK since inception. Since the inception of HACK, it has outperformed the Technology Select Sector SPDR ETF (NYSEARCA: XLK ), 0.60 percent gain versus a 2.10 percent loss for XLK through September 30, but it comes with a high degree of volatility. In September, XLK fell 1.4 percent, but HACK and CIBR fell 6.9 percent and 3.6 percent, respectively. Since the inception of CIBR in July 2015, XLK is down 1.7 percent, versus a 15 percent drop in HACK and a 12.5 percent decline in CIBR. The recent negative returns may be a reflection of the downturn in the overall market rather than the cybersecurity industry, but it reflects the type of volatility investors can expect. The chart below shows XLK in black. The red line shows the price ratio of HACK versus XLK (a rising line indicates outperformance), while the blue line shows the price ratio of HACK versus CIBR. (click to enlarge) With a short history, one cannot make a long-term prediction about relative performance, but to date, the funds are behaving as expected given their construction. When the technology sector is rising, HACK outperforms XLK. When the technology sector is falling, HACK and CIBR underperformed. HACK also underperformed CIBR when the technology sector declined. Outlook HACK’s emphasis on smaller, faster-growing firms makes it more of a pure play on this market niche. Smaller cap stocks often provide better returns during bull markets and worse returns during a bear market and thus far, performance has been as expected. Investors in cybersecurity stocks can look forward to a roller coaster ride, but HACK will likely deliver bigger gains and losses. By concentrating on larger companies due to stricter liquidity requirements, and greater diversification, CIBR focuses on more established names that may make the ETF better suited for more conservative investors – although even CIBR will be far more volatile than the average technology fund. With an expense ratio of 0.60 percent, CIBR also has a lower cost than the 0.75 percent expense ratio of HACK. Weighing the two options, HACK is the better choice for aggressive investors looking for as much pure play exposure as possible as well as more short-term oriented trades. CIBR would be a little better fit for an investor looking to shift some technology exposure into cybersecurity, if only for the lower expense ratio compared to HACK. Both funds have more than adequate daily volume, but HACK has more than 10 times the daily dollar volume of CIBR, making it the more liquid option for large investors.