ETF Trends CEO Tom Lydon discussed the WisdomTree Cloud Computing ETF (WCLD) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
The WisdomTree Cloud Computing Fund seeks to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index, an equally weighted index designed to measure the performance of emerging public companies focused on delivering cloud-based software to customers.
Cloud computing has capitalized on the shift to stay-at-home during the coronavirus pandemic lockdown. As a result, WCLD is +11% in 1-week returns, +36% in 1-month returns, and +23% in year-to-date returns. In comparison, the S&P 500 is +9% in 1-month returns and -10.1% in year-to-date returns.
To recap, cloud computing is the ability to deliver enterprise-level solutions on demand, through a simple internet connection. The “cloud” refers to the aggregation of information online that can be accessed from anywhere, on any device. Cloud companies provide on-demand services to a centralized pool of information technology (IT) resources via a network connection.
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The three major categories of the cloud industry are:
- Software as a Service (SaaS) – Software applications provided over a network connection. For example, Gmail.
- Platform as a Service (PaaS) – Software development environment provided over a network connection. For example, Google App Engine.
- Infrastructure as a Service (IaaS) – IT resources (e.g., store and networking capabilities) provided over a network connection. For example, Amazon Web Services.
Cloud computing represents a significant source of disruption not only in the technology sector but in the investment world as well. It has become ingrained in nearly every aspect of our lives by fundamentally altering how we consume, process and share information in the digital age. The trend toward cloud-based solutions offers a compelling, long-term opportunity for investors to gain exposure to a quickly developing segment of the technology sector.
It is also the right tool for remote working. Companies that often help the workforce to operate virtually “in the cloud” are top of mind. For example, Zoom video conferencing has become a standout. Additionally, cloud-based businesses help us communicate (Slack), sign legal documents at scale and remotely (DocuSign), transfer and save files (Dropbox), and make payments online (PayPal).
This trend toward operating in the cloud is leading to fast relative growth rates and outperformance for the cloud technology industry. Cost-saving efficiencies like the adoption of cloud-based software will continue to accelerate, providing further growth opportunities
Attractive Business Model Advantages
There’s high recurring revenue, which employs a subscription-based revenue model with smaller and more frequent transactions. So a more predictable, annuity-like revenue stream for cloud software providers.
Also of note is high client retention with longer revenue periods, where cloud software becomes embedded in client workflow, resulting in higher switching costs and client retention. Many clients prefer the pay-as-you-go transaction model, which can lead to longer periods of recurring revenue as upselling product enhancements do not require an additional sales cycle.
Lower expenses are also notable, as cloud SaaS companies can have lower R&D cost because they don’t need to support multiple types of networking infrastructure at each client location.
Getting back to WCLD, as mentioned, it tracks BVP Nasdaq Emerging Cloud Index, an equally weighted index designed to measure the performance of emerging public companies focused on delivering cloud-based software to customers. Stock selection requires that companies derive most of their revenue through the cloud-software subscription model.
That’s why WCLD does not hold companies like Amazon or Google, which generate sales from many business segments. The fund designed to provide exposure to emerging companies with rapid growth characteristics, or better growth opportunities.
Listen to the full podcast episode on WCLD ETF:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.