Investors are piling into the cloud computing industry and sector-related exchange traded fund to capture a quickly growing segment of the digital age.
TheFirst Trust ISE Cloud Computing Index Fund (NasdaqGM: SKYY), which tracks a modified equally weighted index of companies engaged in the businesses activity supporting or utilizing cloud computing services, now has $408.5 million in assets under management. SKYY has seen its AUM burgeon twofold over the past year, attracting $214.9 million in net inflows since January 2014, according to ETF.com data.
Cloud computing refers to a mode of accessing digital information from the internet through web-based tools and applications, instead of directly connecting to a server. The desired data and software packages are stored in servers where a consumer can access them anywhere as long as one has access to the internet.
Investors are anticipating a significant shift in technology as old packaged and desktop software are pushed aside while consumers and businesses shift into simpler web- and mobile phone-based services, reports Ari Levy for CNBC.
The global cloud computing market is expected to expand 30% per year and hit $270 billion by 2020.
SKYY breaks down its component holdings into several sub-sectors. Pure play cloud computing companies are comprised of direct service providers for the cloud, which include network hardware/software, storage and cloud computing services. Non-pure play cloud computing companies track those that provide goods and services in support of the cloud computing space. Lastly, technology conglomerate cloud computing companies that directly utilize or support the use of cloud computing.
SKYY includes one of the largest tilts toward Netflix (NasdaqGS: NFLX) at 4.4% of the ETF’s underlying portfolio, along with other companies that utilize cloud computing services, like Amazon (NasdaqGS: AMZN) 3.9%.
The broad ETF, which includes 39 companies involved with cloud computing, provides a diversified way for investors to access the sector as valuing individual companies could be unorthodox. While the cloud computing space has attracted more investment dollars, observers are unsure how to properly value the companies
For example, of the 26 index members to recently go public, 21 are losing money on the generally accepted accounting principle basis, with a combined $388.7 million in the red last quarter – many of the companies opt to incur large expenditures upfront and amortize costs later through revenue streams. Consequently, traditional price-to-earnings ratios may not properly reflect valuations.
Instead, most of these cloud computing-related business models rely on churn and retention – it takes about a year for a customer to become profitable due to costs of sales and market, so the companies rely on renewal rates, which is why subscriber rates are so important for companies like Netflix as witnessed in its last earnings report. [Netflix Post-Earnings Rally Could Lift These ETFs]
First Trust ISE Cloud Computing Index Fund
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