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

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

What Are Smart Beta ETFs?

Products that are based on market cap weighted indexes, which are strategies designed to reflect a specific market segment or the market as a whole, have traditionally dominated the ETF industry.

Because market cap weighted indexes provide a low-cost, convenient, and transparent way of replicating market returns, they work well 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.

This kind of index follows this same mindset, as it attempts to pick stocks that have better chances of risk-return performance; non-cap weighted strategies base selection on certain fundamental characteristics, or a mix of such characteristics.

Even though this space provides many choices to investors--think one of the simplest methodologies like equal-weighting and more complicated ones like fundamental and volatility/momentum based weighting--not all have been able to deliver first-rate results.

Fund Sponsor & Index

The fund is sponsored by First Trust Advisors. It has amassed assets over $3.09 billion, making it one of the larger ETFs in the Technology ETFs. This particular fund, 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

When considering an ETF's total return, expense ratios are an important factor. And, cheaper funds can significantly outperform their more expensive cousins in the long term if all other factors remain equal.

With on par with most peer products in the space, this ETF has annual operating expenses of 0.60%.

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

Sector Exposure and Top Holdings

Even though ETFs offer diversified exposure that minimizes single stock risk, investors should also look at the actual holdings inside the fund. Luckily, most ETFs are very transparent products that disclose their holdings on a daily basis.

This ETF has heaviest allocation in the Information Technology sector - about 86.70% of the portfolio. Telecom and Consumer Discretionary round out the top three.

When you look at individual holdings, Oracle Corporation (ORCL - Free Report) accounts for about 4.30% of the fund's total assets, followed by International Business Machines Corporation (IBM - Free Report) and Alphabet Inc. (class A) (GOOGL - Free Report) .

Its top 10 holdings account for approximately 36.18% of SKYY's total assets under management.

Performance and Risk

The ETF return is roughly 9.81% and is up about 43.34% so far this year and in the past one year (as of 05/20/2024), respectively. SKYY has traded between $67.96 and $97.12 during this last 52-week period.

The fund has a beta of 1.07 and standard deviation of 31.35% for the trailing three-year period, which makes SKYY a medium risk choice in this particular space. With about 66 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 $475.75 million in assets, WisdomTree Cloud Computing ETF has $576.54 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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