Cloud computing stocks and the related ETFs, including the First Trust ISE Cloud Computing Index Fund (NasdaqGM: SKYY), are among the stars of the technology sector this year. Some of that bullishness is attributable to the Coronavirus pandemic, but there are longer-ranging trends at play that make these assets compelling with or without the virus.

SKYY tracks the ISE Cloud Computing Index (CPQ) and provides exposure to multiple cloud growth stories, including Infrastructure-as-a-Service, Platform-as-a-Service, and Software-as-a-Service companies.

The cloud computing industry refers to companies that (i) license and deliver software over the internet on a subscription basis (SaaS), (ii) provide a platform for creating software applications which are delivered over the internet (PaaS), (iii) provide virtualized computing infrastructure over the internet (IaaS), (iv) own and manage facilities customers use to store data and servers, including data center Real Estate Investment Trusts (REITs), and/or (v) manufacture or distribution infrastructure and/or hardware components used in cloud and edge computing activities.

CPQ, which expanded to 62 from 28 components last year, offers a unique methodology.

“With the input of the Consumer Technology Association (CTA), companies now receive points for their involvement in one or more categories (3 for IaaS, 2 for PaaS, 1 for SaaS) and are weighted accordingly. Constituents are capped at 4.5% at each index rebalance and reconstitution,” according to Nasdaq Global Indexes.

Clear Skies for SKYY

Declining costs in cloud adoption and increasing ease of use are among the factors driving the cloud computing boom. Several of CLOU’s marquee components have first-mover advantages in various cloud niches and are building attractive competitive moats in the space. CLOU’s IaaS exposure should beneficial to long-term investors.

Infrastructure-as-a-Service companies provide the computing infrastructure, delivered over the internet, that enables other firms to build services more efficiently. It helps scale computing demand and avoid the high expenses and complexity of buying and managing infrastructure. About 23% of companies in the Index provide some sort of infrastructure-related services.

SKYY is primarily a large-cap fund with positions in cloud giants such as Amazon, Microsoft, Alibaba, and Alphabet, among others.

“In terms of market capitalization for the overall group, the average was $101.0bn, while the weighted average was $221.3bn,” according to Nasdaq. “The median was only $11.3bn, however. This large skew results from the outsized market caps of Amazon, Microsoft, and Google – all in the vicinity of $1-1.5 Trillion (and to some extent, also Alibaba (BABA) at more than $500bn).”

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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.