The shift of computing power to the cloud is fueling the fastest growth segment of the technology sector. It allows start ups to shift precious capital to focus on product development, sales and marketing in getting customers in the door instead of building server infrastructure.
Investing in fast growing stocks in the cloud technology sector can be risky as eye watering price to earning ratios are common, if there is any earnings at all. Risks can be mitigated through investing in a portfolio of stocks or exchange traded fund that tracks the cloud computing sector. Through the use of a diversified portfolio of cloud tech stocks, investors mitigate some individual stock risk where a earning miss could cause a 10% fall in one day.
First Trust ISE Cloud Computing Index Fund (SKYY) is the only pure sector exposure investor can have to track the cloud computing sector. Stocks included in the SKYY ETF ranges across the sector from from household names such Netflix that rely extensively on cloud servers to infrastructure providers like Akamai technologies.
SKKY ETF components
SKKY selects companies in the ETF through the 3 criteria below:
- Pure play cloud computing stocks
- Non pure play cloud computing stocks has cloud computing companies as major customers. This could be either services, support or products.
- Technology conglomerates which indirectly benefit from the sector (note this is limited to 10% of the ETF portfolio value)
Essentially, SKKY being an index tracker follows the ISE Cloud Computing Index.
This ETF is also smartly designed. Unlike traditional ETFs which are market capitalization weighted. The 39 Stocks in SKYY are equally weighted at roughly 2.5% when it is rebalanced semi annually. An equal weight method means that the weight of each stock is the same irrespective of the size of the company.
This can overcome risk of increasing exposure to the most expensive valued stocks when they are at their peak. Investors should know this mechanism also acts like an automatic stabilizer where it sells the winners and add to the losers. It could provide an anchor basis to the cloud computing ETF as you are not letting your winners run.
Returns has also been impressive where over last 3 years it has an annualized return of 18%. This again shows how precious growth is in a low growth and yield environment. Naturally being a high growth technology ETF it does not pay a dividend.
The list of stocks in the fund below can provide some direct investing ideas if the Cloud ETF option is broad.
Cloud Computing Stock List
|Aruba Networks, Inc.||ARUN|
|Akamai Technologies, Inc.||AKAM|
|Rackspace Hosting, Inc.||RAX|
|Red Hat, Inc.||RHT|
|Juniper Networks, Inc.||JNPR|
|Cisco Systems, Inc.||CSCO|
|Facebook, Inc. (Class A)||FB|
|SAP SE (ADR)||SAP|
|Open Text Corporation||OTEX|
|F5 Networks, Inc.||FFIV|
|International Business Machines Corporation||IBM|
|Google Inc. (Class A)||GOOGL|
|Google Inc. (Class C)||GOOG|
|Wipro Ltd. (ADR)||WIT|
|Activision Blizzard, Inc.||ATVI|
|NetScout Systems, Inc.||NTCT|
|j2 Global, Inc.||JCOM|
|EVS Broadcast Equipment S.A.||EVS.BB|
|Check Point Software Technologies Ltd.||CHKP|
|Adobe Systems Incorporated||ADBE|