First Trust Cloud Computing ETF SKYY is a smart beta exchange-traded fund launched on May 27, 2011, designed to provide broad exposure to the technology ETF category in the market.
What are Smart Beta ETFs?
Products based on market-capitalization weighted indexes, strategies designed to reflect a particular market segment or the entire market, have traditionally dominated the ETF industry.
Investors who believe in market efficiency should consider market capitalization indexes that replicate market returns in a low-cost, convenient and transparent manner.
But some investors, who believe they can outperform the market through better stock selection, opt for a different type of fund that tracks non-market-cap weighted strategies: smart beta.
Non-market-capitalization weighted indexes attempt to select stocks that are likely to exhibit better risk/return performance based on certain fundamental characteristics, or a combination of other such characteristics.
Methodologies such as equal weighting, fundamental weighting and volatility/momentum-based weighting, which are among the simplest options, are available to investors in this space, but not all of them deliver superior returns.
Fund Sponsors and Indexes
Managed by First Trust Advisors, SKYY has accumulated more than $2.9 billion in assets, making it one of the larger technology ETFs. Before fees and expenses, SKYY aims 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.
Costs and other expenses
Expense ratios are an important factor in ETF returns, and over the long term, cheaper funds are likely to perform significantly better than more expensive funds, all else being equal.
The ETF’s annual operating expenses are in line with most of its peers, at 0.60%.
SKYY’s dividend yield over the trailing 12 months is 0%.
Sector Exposure and Major Holdings
While ETFs offer diversification and minimize single stock risk, it’s still important to take a closer look at a fund’s holdings before investing. Most ETFs are highly transparent products, and many publish their holdings daily.
In the case of SKYY, the information technology sector has the largest allocation (about 85% of the portfolio), with communications and consumer discretionary sectors rounding out the top three.
Looking at individual holdings, Alphabet Inc. (Class A) GOOGL accounts for approximately 4.94% of total assets, followed by Pure Storage, Inc. (Class A) PSTG and Oracle Corporation ORCL.
The total assets held by the top 10 stocks account for approximately 38.74% of the total assets under management.
Performance and Risk
So far this year, SKYY has returned about 6.33% and is up about 17.76% over the past year (as of July 26, 2024). During this past 52-week period, the fund has traded between $70.93 and $97.55.
SKYY’s three-year beta is 1.08 with a standard deviation of 31.47%, making it a medium-risk fund in the space. It holds around 66 stocks, effectively diversifying company-specific risk.
Alternative proposal
The First Trust Cloud Computing ETF is a great choice for investors looking to outperform the technology ETF segment of the market, and there are other ETFs in this space that investors can consider.
The Global X Cloud Computing ETF CLOU tracks the INDXX GLOBAL CLOUD COMPUTING INDEX, while the WisdomTree Cloud Computing ETF WCLD tracks the BVP NASDAQ EMERGING CLOUD INDEX. The Global X Cloud Computing ETF has assets of $399.63 million and the WisdomTree Cloud Computing ETF has assets of $470.92 million. CLOU has an expense ratio of 0.68% and WCLD has a fee of 0.45%.
Investors looking for cheaper, lower-risk options should consider traditional market-cap weighted ETFs that aim to match the returns of tech ETFs.
Conclusion
If you would like to learn more about this or other ETFs, find one to fit your investment objectives, or read about the latest trends in the world of ETF investing, visit the Zacks ETF Center.
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