Cloud ETF Is A Viable Long-Term Idea

As has been widely documented, the technology sector is the best-performing group in the S&P 500 this year. Stocks with exposure to the booming cloud computing theme are a big reason why technology is soaring.

Just look at the First Trust Cloud Computing ETF SKYY. The only exchange-traded fund dedicated to cloud stocks is up nearly 18 percent year. SKYY is getting a lift from the FAAMG group of stocks. That group is comprised of Facebook Inc. FB, Amazon.com Inc. AMZN, Apple Inc. AAPL, Microsoft Corp. MSFT and Google parent Alphabet Inc. GOOG GOOGL.

Although none of SKYY's 30 holdings command weights of more than 5.2 percent in the ETF, the FAAMG stocks combine for about 19 percent of the ETF's weight. For good measure, Netflix, Inc. NFLX, of the familiar FAANG acronym, accounts for 4.5 percent of the ETF's roster.

Strong Fundamental Trends

Investors have been hearing about the cloud boom for several years and with SKYY up almost 47 percent over the past three years, it would be logical to ponder how much fuel this move has left. Some market observers believe cloud stocks continue offering significant upside.

“The software market will jump the most, growing from $39 billion in 2016 to an estimated $110 billion in 2020, but infrastructure and platform should soar as well, from $38 billion to $70 billion and $13 billion to $30 billion, respectively, according to estimates from ClearBridge Investments,” said Morningstar in a recent note.

SKYY, home to almost $927 million in assets under management, tracks the ISE Cloud Computing Index. That index includes pure play cloud companies, technology conglomerates with cloud exposure and non-pure play cloud companies “that focus outside the cloud computing space but provide goods and services in support of the cloud computing space,” according to First Trust.

Rising Profits

Over the past several years, cloud providers have focused more on research and development and transitioning clients away from competing, non-cloud products. It is expected the focus is now shifting to profits.

“Even when these companies started selling their cloud capabilities, revenues were low — people paying $50 a month for a subscription isn't the same as getting them to pay thousands of dollars up-front for a product,” said Morningstar. “Now, though, those monthly subscription fees are adding up. Cloud companies are investing less in R&D, and the clients that have embraced the cloud are buying more services every year.”

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