Cloud ETFs are all the rage as more people work from home
So it should come as no surprise that a number of specialty exchange traded funds that focus on the business of the cloud have popped up. Is a bubble brewing? Not necessarily.
Instead, several of these ETFs are based on indexes that focus on the small and mid-sized tech firms which run the hosting platforms, data and call centers, software and cell phone towers that help power the cloud.
“Data centers are like the landlord for the big tech firms. You can’t have cloud businesses without this infrastructure. A rack of servers have to be located someplace,” said Sean O’Hara, president of PacerETFs Distributors.
“These are the companies getting paid by charging rent and leases,” O’Hara said.
Forget FAANG and focus on smaller tech firms
The fund, which is based on an index developed by Nasdaq and venture capital firm Bessemer, is targeting midsized software firms with rapidly growing revenue that generate a big portion of their overall business from cloud sales.
“We don’t own Alphabet, Microsoft, Amazon or IBM. We are looking for newer software as a service companies,” said Jeremy Schwartz, WisdomTree’s global head of research.
“Adobe is now in the fund because it has had so much growth in subscription revenue. It has morphed from a traditional software firm to a cloud software leader,” Schwartz said.
Right place at the right time
“The cloud opportunity is the most transformational trend in tech in years,” Ives told CNN Business. “We’re looking for the hearts and lungs of the cloud. We’re going after infrastructure.”
Not all cloud ETFs are shunning the tech titans.
“We want pioneers and tech leaders with resources to push artificial intelligence and the cloud forward,” said Lisa Chai, senior research analyst with ROBO Global.
“What we’re trying to accomplish is to have more companies with exposure to cloud infrastructure, platforms and software,” said Ryan Issakainen, senior vice president and ETF strategist at First Trust.
You can’t ignore these giants, says Jay Jacobs, head of research and strategy at Global X. After all, revenue is growing rapidly for all their cloud units.
And Jacobs said he’s not worried that there are too many cloud ETFs chasing too few investors — especially since some focus more on lesser-known stocks while others have a mix of small caps and blue chips. So all of them have the chance to do well.
“In this stay-at-home economy/Covid-19 world we live in, these companies are in the right spot at the right time,” Jacobs said.