First Trust Takes to the Cloud With SKYY ETF

Jul. 7.11 | About: First Trust (SKYY)

I knew it was just a matter of time before we had a cloud computing ETF (NASDAQ:SKYY). After all, we had the Rare Earth Metals ETF debut shortly after China made headlines by restricting the export of certain rare earth metals critical to communications and military applications, and we’ve seen everything else from Water ETFs to Social Media ETFs. The thing that these ETFs often tend to have in common is that the ETF returns don’t really reflect the true growth or success of the theme.

Oftentimes, these ETFs contain companies that are quite large and the “theme” only comprises a small portion of the company’s business. So let’s see how First Trust’s Cloud ETF is comprised.

  • 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: Focus outside the cloud computing space but provide goods and services in support of the cloud computing space.
  • Technology Conglomerate Cloud Computing Companies: Indirectly utilize or support the use of cloud computing technology.

A neat analysis over at IndexUniverse points out that while SKYY is comprised of different companies with different weightings compared to other widely tracked Tech ETFs like the Technology Select SPDR Fund (NYSEARCA:XLK) and First Trust’s Dow Jones Internet Index Fund (NYSEARCA:FDN), importantly, the performance is virtually the same. IU looked at the underlying index that SKYY will be based on; while there’s not a lot of history, the returns are roughly the same. But you’re paying a higher expense ratio of 60 basis points while taking on more risk in terms of higher Beta.

Time will tell if cloud computing really takes off; people may come to find that “the cloud” is really no different than just “the internet” with a spruced up name and whether the cloud services being touted now can be commoditized. But whether this ETF outperforms other major tech benchmarks on a risk-adjusted basis remains to be seen.

What is clear is that their timing is impeccable. Not a business publication or geek blog passes on a chance to cover the cloud, so at a minimum, First Trust will likely see some decent volume in the ETF.

Disclosure: No holdings in any ETFs cited in this article.