Investing in the Rise of Cloud Computing

Rise of Cloud Computing - Exchange Traded Funds (asx etfs)

Cloud computing is a growth area for tech companies to allocate capital but it’s a difficult sector for individual investors to infiltrate. Pure investment in cloud computing is practically unattainable as the public companies participating in this arena typically offer a wider range of technologies. Nevertheless, investors can participate in the prosperity of cloud computing through an ETF that seeks the main players in this information technology field.

Why It’s Growing

To appreciate the flourishing of cloud computing, investors should uncover how this technology delivers value to its users. The term itself is derived from the visualization of computing power as emerging from the nebulous reaches of a cloud. The simplest of non-technical ways to understand cloud computing is that it comprises use of the internet to provide online software programs, downloadable infrastructure applications, and remote data storage.

Clouds can be either public or private. Google, Apple, and Amazon are examples of operations that supply public services from the cloud. Large organizations frequently desire private cloud services that are accessible only by their employees.

The advantage for consumers is that the only hardware required is a computer with an internet connection. Access to an on-demand cloud network is also available with mobile devices such as tablets and smartphones. No need for large hard drives or an ability to solve software user problems. Rather, cloud-based systems simply entail logging into the desired services on the internet. Software and data are stored outside of the user’s computer, thus substantially lowering IT costs in addition to creating flexibility.

Large tech companies with publicly-traded stock have aggressively expanded into the cloud computing market, including via acquisition of small privately-held enterprises operating in this sector. Organizations such as IBM and Oracle have reported robust revenue growth from cloud-based solutions.

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Investor participation in the extensive cloud computing universe is available from ownership of the First Trust ISE Cloud Computing Index Fund (SKYY). This ETF tracks a benchmark that includes large companies deriving only some of their sales from cloud computing as well as smaller enterprises that receive most of their revenue from this tech sector.

Large tech conglomerates that are active in the cloud computing field represent about one-tenth of the index. Organizations with a portion of their revenue from cloud computing are given a weight in the index equal to the market cap of the conglomerates as a percentage of total market cap of the index. Corporations that sell goods and services from the cloud – or that have these companies as customers – comprise the remainder of the index. Each of the three categories is equal-dollar weighted.

By its nature SKYY is impacted by the market prices of component companies that are not entirely driven by the growth of cloud computing. Netflix and Facebook, for instance, are companies in the index whose share price depends on a variety of other factors. Software corporations that are more closely aligned with expansion of cloud computing comprise the majority of the index. But strong performance by providers of internet services has significantly contributed to SKYY delivering better results than more broadly based technology ETFs.

Volatility of course always overhangs the prices of internet stocks. The drivers of earnings at these companies are the capricious traits of subscriber growth and advertising revenues. These characteristics contrast greatly with measure of the rising number of businesses spending money to migrate platforms to the cloud. Despite the risk, individuals are wise to consider the relative rewards expected from focusing their investments in the tech sector to maximize exposure to cloud computing.

Michael Smith

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