The technology sector and previously hot cloud computing stocks were drubbed last week. The WisdomTree Cloud Computing ETF (WCLD) wasn’t immune to that trend, shedding 7%, but this could be the pullback investors have been waiting for to embrace one of this year’s best-performing tech ETFs.
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.
WCLD was recently rebalanced. Past performance doesn’t guarantee future returns, but the fund surged following its February rebalance.
“WCLD has returned 42% since its February rebalance, which nearly coincided with the peak of the S&P 500 Index. Its performance has significantly outpaced benchmarks for tech, growth, and overall U.S. equities by at least 19 percentage points over the same period,” notes WisdomTree research analyst Kara Marciscano.
Cloud Still Matters
While private and public businesses have made the pivot to a heavier reliance on cloud computing amid the Covid-19 pandemic, government organizations are following in tow. As such, more adoption by local and federal governments could spur cloud computing ETFs, such as WCLD.
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.
An important element regarding WCLD’s latest rebalance is that it drove valuations down a bit, potentially allaying some of the oft-cited concerns about frothy multiples on cloud stocks.
“Heightened interest in the cloud industry along with strong earnings reports in the first and second quarters of 2020 drove valuations significantly higher from 9.7 times price-to-trailing sales in February to 13.0 times prior to the August 2020 rebalance,” writes Marciscano. “Notably, the latest rebalance lowered the aggregate price-to-trailing sales ratio of WCLD by roughly one point to 11.8 times.”
WCLD is still equally weighted, which is one reason the fund is thumping rivals this year.
“With market capitalizations ranging in size from $231 billion (PayPal) to $1 billion (Domo, enterprise management software), WCLD’s equally weighted composition provides significant exposure to fast-growing, emerging businesses that are often overlooked or diluted in market cap-weighted benchmark,” according to Marciscano.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.