ETF Spotlight: August 2011

Published on by on August 2, 2011 | Updated August 23, 2011

Each month, we highlight an ETF flying under the radar of most investors that offers exposure to a unique asset class or investment strategies. This month, we take a closer look at a new equity fund from First Trust, the first Cloud Computing ETF (SKYY). This fund seeks to offer exposure to tech-companies actively involved in the cloud computing industry, making it an appealing offering for those interested in this particular corner of the market.

Financial woes stemming from the Eurozone have largely weighted down equity markets this summer and more recently ongoing negotiations regarding the debt-ceiling at home have sent many investors to the sidelines. Despite all of this uncertainty, lucrative opportunities still exist  and many long-term investors are taking advantage of sell-offs to accumulate exposure in particular corners of the market that offer tremendous growth potential.

Investors should consider the technology sector as it remains full of opportunities given the sheer amount of innovation and competition in the marketplace. Many experts anticipate that cloud computing, which is one of the newest corners of the tech-sector, will grow significantly in the coming years as companies and individuals start to see the numerous benefits that this modern industry can offer. 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. According to research company IDC, spending on public cloud computing services will grow five times faster than global IT spending in 2011. Also, as internet access becomes more widespread across the world, the cloud industry will gain significant potential, and companies can begin to push their services internationally in areas that may not have been worth considering just years earlier thanks to the cost savings of the cloud.

The First Trust ISE Cloud Computing Index Fund (SKYY) is linked to a unique benchmark that includes everything from small relatively new tech companies to established giants such as Microsoft, Apple, and Google. The methodology behind the index includes both “pure play” cloud computing companies that focus their operations on this emerging technology, as well as firms that derive only a portion of their revenues from “the cloud”. Investors should  note that within SKYY’s underlying index, allocations 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. Lastly, within each of the three classifications, stocks will be equally-weighted.

Upon its release SKYY came flying out of the gates and traded an aggregate of over one million shares in its first two days on market, quickly blowing past the $10 million mark that many new ETFs take months to clear. SKYY has 40 holdings in total and significant weightings include software companies (33% of the underlying index), Internet software and services (23%), and communications equipment (17%). The funds “hot” launch clearly shows that investors are anxious to get a foot in this corner of the tech-market.  What remains to be seen however, is just how the growth of the cloud will impact the bottom lines of the companies that make up SKYY.

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