Are You Ready... The Cloud ETF Arrives (SKYY, NFLX, RNOW, OTEX, RAX, TIBX, INFA, APKT, TDC, ARUN, EQIX)

The new saying in investing is “There’s an ETF for that!”  Now you can count THE CLOUD in there.  First Trust has just launched its Cloud-ETF, called the First Trust ISE Cloud Computing Index Fund (NASDAQ: SKYY).  The expense ratio is probably not going to be considered outrageous but is higher than many ETF products with its 0.60% expense ratio.

The top components are as follows: NetFlix Inc. (NASDAQ: NFLX) 4.46%; RightNow Technologies Inc. (NASDAQ: RNOW) 4.15%; Open Text Corp. (NASDAQ: OTEX) 4.13%; Rackspace Hosting Inc. (NYSE: RAX) 4.11%; TIBCO Software Inc. (NASDAQ: TIBX) 3.91%; Informatica Corp. (NASDAQ: INFA) 3.89%; Acme Packet Inc. (NASDAQ: APKT) 3.87%; Teradata Corp. (NYSE: TDC) 3.80%; Aruba Networks Inc. (NASDAQ: ARUN) 3.78%; and Equinix Inc. (NASDAQ: EQIX) 3.70%.  The classification stresses software at 32.53%, Internet software & services as 22.61%, communications equipment at 16.75%, and computer & peripherals at 11.15%.

The index tracks the ISE Cloud Computing™ Index and is said to be modified in equal-dollar weightings and is meant to track the cumulative performance of companies “actively involved in the cloud computing industry.”  Minimum participation requires being engaged in a business activity supporting or utilizing the cloud computing space, as well as a share listing on an index-eligible global stock exchange, and finally a minimum market capitalization rate of $100 million.

The three segments in the index are the following:

• pure-play cloud computing companies: direct service providers for the cloud or companies that deliver goods and services that utilize cloud computing technology;
• non-pure-play cloud computing companies: companies that focus outside the cloud computing space, but those which provide goods and services in support of the cloud computing space;
• Technology Conglomerate Cloud Computing Companies: These are large broad-based companies that indirectly utilize or support the use of cloud computing technology.

The overall weight by segment is 10% allocated to technology conglomerate companies.  The rest is stated as, “The index weight that is allocated to non pure play companies is calculated by dividing the non pure play companies’ market capitalization by the sum of the pure play, non pure play and technology conglomerate market capitalizations. The remainder of the index weight is allocated to pure play companies.”  Stocks are equally weighted within each of the three classifications and the index is reconstituted semi-annually and rebalanced quarterly.

After looking at the fact sheet, here are more details.  The minimum constituent market cap is $863 million, the median market cap is $9.65 billion, and the highest market cap is $321 billion.  The average P/E ratio is 33.37, the average price/book ratio is 5.10, the average price-to-cash flow ratio is 17.75, and the average Price/sales ratio is 4.20.

It is up to you as to decide whether or not you are a believer in an ETF with modified weightings such as this.  When we hear “There is an ETF for that!” the question that always comes to mind is “Should there be?”

JON C. OGG