Up In The Clouds: First Cloud Computing ETF Debuts

by on July 6, 2011 | ETFs Mentioned:

First Trust has rolled out the industry’s first ETF focused exclusively on the cloud computing industry, debuting the ISE Cloud Computing Index Fund (SKYY) on Wednesday. The new ETF will seek to replicate a modified equal-dollar weighted index comprised of companies involved in the cloud computing industry, including both “pure play” companies and those with operations that more generally involve cloud computing. Specifically, companies deemed to be engaged in the cloud computing industry are allocated to one of three buckets:

  • Pure Play Cloud Computing Companies: Direct service providers for “the cloud” or companies that deliver goods and services that utilize cloud computing technology.
  • Non Pure Play Cloud Computing Companies: Focus outside the cloud computing space but provide goods and services in support of the cloud computing space.
  • Technology Conglomerate Cloud Computing Companies: Indirectly utilize or support the use of cloud computing technology.

Conglomerate companies will account for 10% of the underlying index. The index allocation to the non-pure play companies will be equal to the aggregate market cap of those firms divided by the total market cap of index components; the remainder will be allocated to pure play cloud computing companies. Within each of the three classifications, stocks will be equally-weighted. “Cloud computing is projected to be one of the fastest growing IT markets this year, according to IDC Research,” said Ryan Issakainen, Senior Vice President, ETF Strategist. “As businesses and consumers continue to migrate to a cloud environment, we believe there are significant growth opportunities for the companies involved in all aspects of cloud computing. The ETF provides a way to gain exposure to those companies.”

In total, the new ETF has about 40 total holdings, most of which fall under various sub-sectors of the technology industry. Significant weightings include software companies (33% of the underlying index), Internet software and services (23%), and communications equipment (17%).

Case For Cloud Computing

Cloud computing is a new and rapidly-expanding segment of the tech market, and companies such as Apple, Google, Amazon, and IBM have stepped to to provide cloud computing services to businesses of all sizes. Cloud computing has a number of different applications, but the general idea is relatively simple. “Simply put, the cloud allows the storage and retrieval of information from a remote server via a network, rather than an individual PC,” writes Scott Neuman. “The advantages include on-demand network access to information by way of PCs, tablets, smartphones and other computing devices.”

Cloud computing has the potential to significantly enhance IT flexibility while simultaneously pushing down costs, especially for small and mid-sized businesses. While some have already embraced cloud computing, many analysts agree that the potential need for cloud computing-related services is tremendous, and will increase considerably in coming years. According to research company IDC, spending on public cloud computing services will grow five times faster than global IT spending in 2011 [First Trust put together a nice guide to the cloud computing space].

Under The Hood

There is a strong likelihood that cloud computing revenues will grow in coming years, but it remains to be seen just how closely gains in that industry translate into gains in SKYY. While all components of the index are engaged to some extent in cloud computing, many stocks represented in the index are also impacted by other factors. One of the largest components of the underlying index, for example, is Netflix.

SKYY is the 60th ETF from First Trust, and is among several products from the company that offer targeted sub-sector level exposure. Already this year, First Trust has launched the NASDAQ Global Auto Index Fund (CARZ) and NASDAQ CEA Smartphone Index Fund (FONE).

[For more on the new cloud computing ETF, see the SKYY fact sheet. For updates on all new ETF launches, sign up for our free ETF newsletter.]

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