Launched on 05/27/2011, the First Trust Cloud Computing ETF (SKY – Free Report) is a smart beta exchange-traded fund offering broad exposure to the technology ETF category of the market.
What are Smart Beta ETFs?
Market-cap-weighted indices were created to reflect the market, or a specific segment of the market, and the ETF industry has traditionally been dominated by products based on this strategy.
Market-cap-weighted indices are ideal for investors who believe in market efficiency. They offer an inexpensive, convenient and transparent way to replicate market returns.
But some investors prefer to invest in smart beta funds; these funds follow non-cap-weighted strategies and are a solid option for those who prefer to pick great stocks to beat the market.
Non-cap-weighted indices strive to choose stocks that have a better chance of risk-return performance, that are based on specific fundamental characteristics, or a combination of other similar characteristics.
This area offers many different investment choices, such as the simplest equal weighting, fundamental weighting, and volatility/momentum based weighting methodologies; however, not all of these strategies can yield superior results.
Fund Sponsor and Index
SKYY is managed by First Trust Advisors, and this fund has raised over $2.59 billion, making it one of the largest ETFs among tech ETFs. This particular fund seeks to match the performance of the ISE Cloud Computing Index before fees and expenses.
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 and other expenses
For ETF investors, expense ratios are an important factor when considering a fund’s performance; in the long run, cheaper funds actually have the ability to outperform their more expensive cousins if all other things stay the same.
The annual operating expense of this ETF is 0.60%, putting it on par with most peer products on the market.
Its 12-month dividend yield is 0.23%.
Sector exposure and main holdings
Although ETFs provide diversified exposure that minimizes single-stock risk, investors should also examine the actual holdings within the fund. Fortunately, most ETFs are very transparent products that disclose their holdings on a daily basis.
For SKYY, it has the heaviest allocation to the information technology sector – around 85.60% of the portfolio – while telecommunications and consumer discretionary round out the top three.
Looking at individual holdings, Mongodb, Inc. (MDB – Free Report) accounts for approximately 4% of total assets, followed by Pure Storage, Inc. (Class A) (PSTG – Free Report) and Arista Networks, Inc. (sides – free report).
SKYY’s top 10 holdings represent approximately 34.21% of its total assets under management.
Performance and risks
The ETF has lost around -44.19% so far this year and is down around -45.26% over the past year (as of 02/01/2023). Over the past 52 weeks, it has traded between $55.50 and $103.46.
The fund has a beta of 1.02 and a standard deviation of 35.14% for the three-year period, making SKYY a medium-risk pick in this particular space. With approximately 71 holdings, it effectively diversifies company-specific risks.
Alternatives
The First Trust Cloud Computing ETF is a great option for investors looking to outperform the technology ETF segment of the market. There are other ETFs in the space that investors might also consider.
Global X Cloud Computing ETF (NAIL – Free Report) tracks the GLOBAL CLOUD COMPUTING INDEX and the WisdomTree Cloud Computing ETF (WCLD – Free Report) tracks the BVP NASDAQ EMERGING CLOUD INDEX. Global X Cloud Computing ETF has $540.05 million in assets, WisdomTree Cloud Computing ETF has $573.08 million. CLOU has an expense ratio of 0.68% and WCLD charges 0.45%.
Investors looking for cheaper, lower-risk options should consider traditional market-cap-weighted ETFs that aim to match the returns of technology ETFs.
Conclusion
To learn more about this product and other ETFs, research products that fit your investment goals, and read articles about the latest developments in the ETF investment universe, please visit Zacks ETF Center.
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