Battle Of Cloud Computing ETFs

July 01, 2019

The First Trust Cloud Computing ETF (SKYY) raked in $1.1 billion in fresh net assets in the third week of June—a huge sum for an otherwise narrowly focused ETF, and one that landed it among that week’s biggest creations.

The fund, however, went on to face just over $1 billion in net outflows this past week—a complete unwind of the previous week’s trade, bringing year-to-date total creations to a modest net of $260 million.

 

 

These big swings in flows, while dramatic, don’t change the fact that, as far as thematic ETFs go, SKYY is a bona fide success.

The first fund to focus exclusively on cloud computing (launched in 2011), SKYY is today a $2.2 billion ETF. It’s also pretty liquid, trading nearly $16 million on average a day at spreads of about 0.03%.

SKYY even scores high when it comes to environmental social governance (ESG) metrics. The fund has an MSCI ESG score of nearly 7 (out of 10), meaning its basket of underlying stocks is strong, and should be pretty resilient in the face of ESG risk factors.

Competition Picking Up

But SKYY is no longer the only game in town.

While there are many ETFs that tiptoe around cloud computing names, SKYY is facing strong competition from a newcomer that’s just as focused—if not more focused—on the universe of cloud computing companies. That competitor, though while new, is seeing some impressive traction right out of the gates.

The Global X Cloud Computing ETF (CLOU), which launched just two months ago, is already a $403 million ETF, having attracted about 60% more assets than SKYY this year.

 

 

Perhaps one of the drivers of CLOU’s immediate success is in the strategy itself.

CLOU, tracking a market-cap-weighted global index of developed and emerging market names, invests in companies that generate at least 50% of their revenue from cloud computing. That list includes software as a service (SaaS) companies, platform and infrastructure as a service, data centers and even hardware manufacturers.

It’s a pretty concentrated portfolio—currently comprising only 37 securities—that’s meant to be a pure-play approach to accessing the cloud computing industry. While heavily tilted toward U.S. stocks, which represent about 93% of CLOU’s country allocations, the fund also currently has exposure to Australia and China stocks.

Here’s a glance inside the portfolio:

 

 

By comparison, SKYY is a more diluted approach to cloud computing, given that the strategy does not have any filters for sources of revenue, resulting in a portfolio that invests in SaaS, PaaS and IaaS, but one that also owns broader technology giants such as Microsoft, Oracle and even Amazon.

 

[Use our stock finder tool to find an ETF’s allocation to a certain stock.]

From a sector perspective, software and information technology services represent only 71% of SKYY versus 83% of CLOU. Here’s a look at SKYY’s portfolio:

 

 

These allocations tilt SKYY toward larger cap names versus competing CLOU. SKYY has a weighted average market capitalization of $206 billion. CLOU’s average market cap sits at $71 billion.

SKYY is also a broader portfolio in number of holdings—it owns roughly twice as many stocks as CLOU does.

What has been perhaps more notably different about them in the past two months since CLOU’s inception is their performance. Check out CLOU’s outperformance:  

 

Chart courtesy of StockCharts.com

 

Under The Surface

In a year when technology is the best-performing S&P 500 sector, rallying almost 26%, underperformance in a tech-segment ETF is a little hard to stomach for some investors.

The divergence in performance is directly tied to underlying holdings. It’s SaaS companies that are shining the brightest, and CLOU has a stronger focus on them.

Consider that SKYY’s top holdings, Oracle and Amazon, are up about 3-4% in the past two months (since CLOU’s inception); MongoDB is up 5%; CenturyLink is in the red. Microsoft is up 11%. That’s the fund’s top five holdings in terms of allocation.

 

[Use our stock finder tool to find an ETF’s allocation to a certain stock.]

 

Meanwhile, CLOU’s top holding, the SaaS company Anaplan (PLAN), is up 40% in the past two months. Coupa Software (COUP) is up 32%; Shopify (SHOP) is up 38%. Cloud-based security company Zscaler (ZS) is up 15.5%. These are big returns, outsized relative to the broader tech sector, driving CLOU’s performance.  

There’s no question investors are paying a little more for that outperformance. CLOU costs 0.68% in expense ratio, or $68 per $10,000 invested, versus 0.60% for SKYY. That’s a price tag 13% higher than its main competitor.

But so far, investors seem undeterred by that cost difference, pouring assets into CLOU in an effort to capture the hot performance of the software industry this year, and making CLOU one of the most successful thematic ETF launches we’ve seen in a while.

Contact Cinthia Murphy at [email protected]

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