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Is First Trust Cloud Computing ETF (SKYY) a Strong ETF Right Now?

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Designed to provide broad exposure to the Technology ETFs category of the market, the First Trust Cloud Computing ETF (SKYY - Free Report) is a smart beta exchange traded fund launched on 05/27/2011.

What Are Smart Beta ETFs?

The ETF industry has traditionally been dominated by products based on market capitalization weighted indexes that are designed to represent the market or a particular segment of the market.

Market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns, and are a good option for investors who believe in market efficiency.

On the other hand, some investors who believe that it is possible to beat the market by superior stock selection opt to invest in another class of funds that track non-cap weighted strategies--popularly known as smart beta.

Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.

The smart beta space gives investors many different choices, from equal-weighting, one of the simplest strategies, to more complicated ones like fundamental and volatility/momentum based weighting. However, not all of these methodologies have been able to deliver remarkable returns.

Fund Sponsor & Index

The fund is managed by First Trust Advisors, and has been able to amass over $2.97 billion, which makes it one of the larger ETFs in the Technology ETFs. SKYY, before fees and expenses, seeks to match the performance of the ISE Cloud Computing Index.

The ISE Cloud Computing Index is a modified market capitalization weighted index designed to track the performance of companies actively involved in the cloud computing industry.

Cost & Other Expenses

Expense ratios are an important factor in the return of an ETF and in the long-term, cheaper funds can significantly outperform their more expensive cousins, other things remaining the same.

Operating expenses on an annual basis are 0.60% for SKYY, making it on par with most peer products in the space.

The fund has a 12-month trailing dividend yield of 0%.

Sector Exposure and Top Holdings

ETFs offer diversified exposure and thus minimize single stock risk, but it is still important to delve into a fund's holdings before investing. Most ETFs are very transparent products and many disclose their holdings on a daily basis.

Representing 83.10% of the portfolio, the fund has heaviest allocation to the Information Technology sector; Telecom and Consumer Discretionary round out the top three.

Looking at individual holdings, International Business Machines Corporation (IBM - Free Report) accounts for about 4.60% of total assets, followed by Oracle Corporation (ORCL - Free Report) and Nutanix, Inc. (class A) (NTNX - Free Report) .

Its top 10 holdings account for approximately 38.25% of SKYY's total assets under management.

Performance and Risk

The ETF return is roughly 16.30% and is up about 35.12% so far this year and in the past one year (as of 09/26/2024), respectively. SKYY has traded between $70.93 and $102.35 during this last 52-week period.

SKYY has a beta of 1.08 and standard deviation of 31.80% for the trailing three-year period, which makes the fund a medium risk choice in the space. With about 63 holdings, it effectively diversifies company-specific risk.

Alternatives

First Trust Cloud Computing ETF is an excellent option for investors seeking to outperform the Technology ETFs segment of the market. There are other ETFs in the space which investors could consider as well.

Global X Cloud Computing ETF (CLOU - Free Report) tracks INDXX GLOBAL CLOUD COMPUTING INDEX and the WisdomTree Cloud Computing ETF (WCLD - Free Report) tracks BVP NASDAQ EMERGING CLOUD INDEX. Global X Cloud Computing ETF has $348.11 million in assets, WisdomTree Cloud Computing ETF has $404.17 million. CLOU has an expense ratio of 0.68% and WCLD charges 0.45%.

Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Technology ETFs.

Bottom Line

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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