[Editor's Note: This article originally appeared on June 23, 2020.]
Cloud computing has proven to be one of the most successful investment themes of 2020, and there's little doubt why.
With so many people worldwide now working, shopping and even socializing virtually, cloud-based platforms and services have quickly become infrastructure as vital to our lives as roads and sewer pipes.
As a result, over the past several months, cloud computing ETFs like the First Trust Cloud Computing ETF (SKYY), the Global X Cloud Computing ETF (CLOU) and the WisdomTree Cloud Computing Fund (WCLD) have posted super-sized gains.
In fact, so far in 2020, WCLD has been the best-performing nonleveraged ETF outside of volatility products, rising an eye-popping 43%. (Compare that to the broad U.S. market proxy, the SPDR S&P 500 ETF Trust (SPY), which has lost 3% over the same period):
Source: StockCharts.com; data as of June 19, 2020
But not every cloud computing ETF has equally benefited from the sector's growth, and relative performance has much to do with how each fund defines and selects its constituents. We take a closer look below.
4 Cloud Computing ETFs See Big Returns
Currently there are four cloud computing ETFs on the market, totalling $5.6 billion in assets under management. The lion's share of that is in the subsector's first mover, SKYY, which has $4.5 billion in net assets.
Meanwhile, CLOU and WCLD have $748 million and $283 million in investment assets, respectively. A fourth newcomer, the Wedbush ETFMG Global Cloud Technology ETF (IVES), has $41 million.
|Pure-Play Cloud Computing ETFs|
|Ticker||Fund||Expense Ratio||AUM (M)||1-Month Return||YTD Return||YTD Flows (M)||Spread|
|SKYY||First Trust Cloud Computing ETF||0.60%||$4,520||9.53%||20.54%||$1,613.00||0.06%|
|CLOU||Global X Cloud Computing ETF||0.68%||$748||12.11%||33.49%||$150.80||0.15%|
|WCLD||WisdomTree Cloud Computing Fund||0.45%||$283||16.32%||47.87%||$229.75||0.30%|
|IVES||Wedbush ETFMG Global Cloud Technology ETF||0.68%||$41||13.30%||--||--||0.82%|
Source: ETF.com; data as of June 18, 2020
SKYY might be the biggest fund, but performancewise, newer funds have left it in their dust. Year to date, SKYY has risen 21%, while CLOU has increased by 33% and WCLD has risen 48%.
(You can compare the two portfolios side by side with our ETF Comparison Tool by entering the tickers at the top.)
We should point out that although IVES is an older fund and appears to have a long track record of returns before it became a cloud computing ETF, we have not included that data in the above graphics, as it is not relevant to the fund's current theme.
IVES just recently was IFLY, an ETF that focused on drone technology. However, in April 2020, the fund's manager, ETFMG, swapped IFLY's benchmark for a cloud computing index. That was similar to when ETFMG converted a Latin American real estate fund into the first marijuana ETF (read: "When An ETF Changes Its Exposure").
Therefore, any performance data before April 7 pertains to when the fund still tracked drone tech stocks, and we caution investors not to be confused by IVES' historical returns.
CLOU: Thematic ETF Of The Year
All four of the cloud computing ETFs start from a similar breakdown of the cloud computing subsector, but it's the nuances between them that have led to such significant differences in return.
Let's start with CLOU, which applies a broad yet fairly common sense definition of what cloud computing means. It also happens to be this year's ETF.com's Thematic ETF Of The Year award winner (read: "The Annual ETF.com Awards").
CLOU holds companies that generate 50% or more of their revenues from one of five business models, including those that:
- License and deliver software through online subscriptions, known as software as a service (SaaS)
- Provide a platform for creating online software apps, known as platform as a service (PaaS)
- Provide online, virtual computing infrastructure, known as infrastructure as a service (IaaS)
- Own and manage data and server storage facilities, including data center REITs
- Manufacture or distribute infrastructure and hardware components used in cloud and edge computing
SKYY: Exposure Diluted By Big Tech
SKYY's investment universe is similar to CLOU's, but the ETF breaks its selection universe into three buckets: pure plays, nonpure plays and broad technology conglomerates.
SKYY doesn't filter for revenue, meaning that any stock with involvement in cloud computing—no matter how small a fraction it has of the firm's total revenue—can make that company eligible for inclusion.
That leads to a portfolio that invests in SaaS, PaaS and IaaS pure-play firms, but also one that owns broad tech firms, such as Amazon (AMZN) and Microsoft (MSFT), for which cloud computing makes up a smaller share of business. Amazon and Microsoft are in fact SKYY's top two stocks, at 5% and 4% of the portfolio, respectively (read: "ETF Of The Week: Cloud Computing Rises").
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
What's more, SKYY caps exposure to tech conglomerates at 10%, but doesn't cap exposure to nonpure-play stocks. Instead, that allocation is calculated by dividing the total market cap of these companies by the sum of both the pure and nonpure-play market caps.
That skews SKYY's portfolio even more toward companies for whom cloud computing isn't a primary business line, diluting its overall thematic exposure and putting it much more in line with a broad tech fund (read: "Battle Of The Cloud Computing ETFs").
WCLD: Selecting For Growth
WCLD covers much the same ground as CLOU and SKYY, but notably has a revenue screen on its selection universe, requiring that any stock newly included in the index demonstrate a revenue growth rate of at least 15% for the past two fiscal years; and 7% in at least one of the past two years for existing stocks. Constituents, once selected, are then equal-weighted.
WCLD's revenue screen emphasizes sustainable growth, selecting not just for quickly growing companies, but companies that have managed to maintain that growth over some track record. Not surprisingly, the fund also has a significantly smaller tilt than either CLOU or SKYY, with an average market cap of $18 billion, compared with CLOU's $100 billion and SKYY's $195 billion.
The growth-oriented approach has struck a chord with investors, who have added $230 million in new net cash so far this year. That makes WCLD one of the fastest-growing ETFs of 2020 (read: "Fastest Growing ETFs Of The Year").
IVES: A Truly Global Approach
Meanwhile, IVES takes a similar approach to CLOU, casting a wide net across international markets, and requiring that stocks generate at least 50% of their revenue from cloud computing.
But IVES' approach is much more about identifying the companies that are building the backbone of cloud computing infrastructure and helping other companies go cloud-based, rather than identifying the biggest users of cloud services, per se. According to the prospectus, IVES excludes firms whose primary business model is the distribution of software or services via the cloud.
The distinction is somewhat nebulous, but IVES' portfolio does exclude some fairly high-profile cloud computing stocks, such as Zoom Video Communication (ZM), DocuSign (DOCU) and Workday (WDAY).
IVES' other main distinguishing feature is its greater emphasis on international stocks. While CLOU claims to be a global ETF, in practice, its portfolio is overwhelmingly dominated by U.S. names (88%, as of its latest fact sheet).
Meanwhile, IVES only allocates about 56% of its portfolio to the U.S., supplementing its portfolio with Japanese equities (19%) and Swedish companies (5%).
Stepping Beyond The Subsector
For investors leery of investing in such a narrow theme, other ETFs exist that hold cloud computing companies as part of a broader basket of "disruptive technologies."
For example, both the ARK Next Generation Internet ETF (ARKW) and the ALPS Disruptive Technologies ETF (DTEC) explicitly include cloud computing companies as part of their selection universe.
Furthermore, cloud computing companies often appear in ETFs whose investment objective has nothing to do with tech.
For example, Coupa Software, Inc. (COUP), a software stock that appears in all four cloud computing ETFs, also appears in 73 other ETFs, including a few momentum ETFs, several large-, mid-, and small-cap-oriented funds and even a few ESG ETFs.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Another example is Zoom, which appears in three of the four cloud computing ETFs, as well as 47 other ETFs, including many growth funds, an IPO ETF and one focused on the gig economy.
Contact Lara Crigger at [email protected]