By Todd Rosenbluth, CFRA
Since 2015, the number of thematic ETFs available in US quadrupled to 125 as of the end of the first quarter of 2020. But even with increased competition, the asset base has tripled to $25 billion. Years ago, when advisors wanted to tap into a long-term theme that could benefit from technological developments or shifts in consumer behavior or the physical environment, they had to purchase a couple of individual stocks and hope the spotted the winners, not the losers. Today, investors can benefit from diversification using ETFs connected to themes like automation through robotics, cannabis, clean energy, cybersecurity, health care innovation, video games and more. However, the most popular of these themes is now cloud computing.
Jay Jacobs, head of research at strategy at Global X, last week joined me for a webinar for CFRA clients titled “Understanding How and Why to Consider Thematic ETFs”. During the event, which can be attended through the replay, Jacobs explained “for a long time Automation/AI held pole-position as the most widely accepted theme by ETF investors, as investors sought to gain exposure to the increasing adoption and technological advancements in robotics. Yet, in the face of COVID-19, where many companies had to change their software and processes to enable work from home virtually overnight, we have seen a surge in interest in the Cloud Computing theme.”
As of March 31, 2020, cloud computing passed robotics to become the largest theme in the ETF industry, with nearly $3 billion in assets under management. Cloud computing ETF assets were largely unchanged from the end of 2019 despite the global stock market selloff driven by the economic impact of COVID-19.
According to Jacobs, attempts to contain the spread of COVID-19 have included widespread efforts to keep people at home. Indeed, children are learning virtually via video conferring with their teachers; workers are using remote-login features like VPNs and virtual desktops to access their data and software from their homes; and consumers are streaming media on their TVs for entertainment.
Jacobs contended this functionality depends on cloud computing infrastructure and software to deliver data and content over the internet to wherever people are self-isolating. While companies and consumers have been transitioning to cloud computing solutions for the last few years, COVID-19 has become a powerful accelerant for this theme.
First Trust Cloud Computing ETF (SKYY ) and Global X Cloud Computing ETF (CLOU) are the two largest products in the space but as CFRA research reveals, what is inside and how much the funds cost are different.
Jacobs was joined on CFRA’s webinar by Jon Maier, chief investment officer for Global X. Maier runs model portfolios for advisors using thematic ETFs. He explained that cloud computing is largely a subset of technology companies that are well-positioned to benefit from the increased adoption of cloud computing services, such as infrastructure as a service (IaaS) companies providing compute and storage on an as-needed basis and software as a service (SaaS) companies offering internet-accessed software solutions.
Advisors managing growth-oriented portfolios can carve out a thematic bucket explained Maier that gains exposure to a handful of themes with an eye towards long term holding periods. For example, CLOU could be combined with products offering to robotics or Internet of things offered by Global X or other asset managers. Thematic ETFs like these tend to have limited overlap of holdings, which enhances the diversification benefits.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.