ETF Pipeline: Nigeria Fund, Cloud Computing ETF On Tap

by on June 28, 2011 | ETFs Mentioned:

The latest round of new product launches has pushed the total for the ETF total to 1,300, close to twice the number of products trading just a couple of years ago. But if the activity behind the scenes is any indication, the growth spurt is far from over. Multiple issuers continue to stuff the product pipeline with proposed funds, many of which represent first-to-market ideas that haven’t yet been offered up in ETF form.

Nigeria ETF

Van Eck’s ETF lineup already includes a number of products offering targeted exposure to smaller emerging and frontier markets, from Vietnam (VNM) to Egypt (EGPT). Joining a proposed Mongolia ETF in the product development pipeline recently was the Market Vectors Nigeria ETF, which would focus on companies listed in or operating in one of Africa’s oil-rich economies. The proposed ETF would seek to replicate the Market Vectors Nigeria Index, a modified capitalization weighted, float adjusted index that includes companies that are domiciled and primarily listed on an exchange in Nigeria or that generate at least 50% of their revenues in Nigeria.

Nigeria is one of Africa’s largest economies and a major exporter of oil. After years of economic mismanagement, Nigeria has embraced market reforms in recent years and experienced tremendous GDP growth. Still, there remains significant room for improvement and further economic growth; Nigeria faces elevated poverty rates and is often held out as an example of the adverse impacts of a “resource curse.” Investors seeking exposure to Nigeria have few options among the current lineup of exchange-traded products. According to the ETF Country Exposure Tool, the largest weights to Nigerian stocks come in the Market Vectors Africa ETF (AFK) and Guggenheim Frontier Markets ETF (FRN), which allocate about 18% and 3%, respectively [ETFs For The Next 11 Economies].

Cloud Computing ETF

Another of the more interesting ETF ideas working its way towards the market comes from First Trust, which has detailed plans for the first Cloud Computing ETF. The ISE Cloud Computing Index Fund (SKYY) will seek to replicate an equal-weighted index that includes companies actively involved in the cloud computing industry. The underlying benchmark will include about 40 stocks operating in a number of technology sub-sectors, such as software, communications equipment, computers & peripherals, and Internet software and services [see all the ETFs in the Technology Equities ETFdb Category].

The index will consist of companies that fall into three business segments:

  • Pure Play Cloud Computing Companies: Direct service providers for the cloud network or companies that provide goods and services that utilize cloud computing technologies.
  • Non Pure Play Cloud Computing Companies: Focus outside the cloud computing segment but provide goods and services that support the cloud computing industry.
  • Technology Conglomerate Cloud Computing Companies: Includes companies that indirectly utilize or support cloud computing technology.

Three quarters of the index will go towards pure play cloud computing companies, with the remainder split between non pure play (15%) and technology conglomerates (10%).

The cloud computing space has been expanding rapidly as more and more companies embrace the new technology as a more efficient way to manage technology infrastructure. Total public cloud revenues are projected to increase more than 25% annually to almost $160 billion in 2020 according to Forrester Research. As such, the proposed SKYY will include several companies with high pricing multiples and tremendous growth potential; the P/E ratio for the underlying index was recently about 33x, with a price-to-cash flow metric of about 18x [Under The Hood Of Value And Growth ETFs].

SKYY is scheduled to begin trading in early July.

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Disclosure: No positions at time of writing, photo is courtesy of Saalm.