McKinsey estimates that the cloud adoption by Forbes Global 2000 companies could generate $3 trillion in EBITDA by 2030. That’s a big reason investors should consider the best cloud computing ETFs to buy.
Sure, you could bet on Microsoft (NASDAQ:MSFT) to win the cloud computing race, and you’d probably do just fine. However, you’re exposing yourself to significant company risk by focusing your bet on one specific company. Investing in a cloud computing ETF spreads the risk across many different companies. And as they say, a rising tide lifts all boats.
VettaFi lists six U.S.-listed cloud computing ETFs. Unfortunately, that doesn’t give us a lot of options. So we’ll broaden the search to include other technology ETFs with a decent commitment to cloud computing.
Here are the three best cloud computing ETFs to buy now.
| SKYY | First Trust Cloud Computing ETF | $62.73 |
| WCLD | WisdomTree Cloud Computing Fund | $27.63 |
| ARKW | ARK Next Generation Internet ETF | $50.91 |
First Trust Cloud Computing ETF (SKYY)
The largest cloud computing ETF by a country mile is the First Trust Cloud Computing ETF (NASDAQ:SKYY), with $2.6 billion in net assets. It is also the oldest, launched in July 2011.
The ETF tracks the performance of the ISE CTA Cloud Computing Index, a collection of companies involved in the cloud computing industry. To be included in the index, a company must have a minimum market capitalization of $500 million, a minimum free float of 20%, and a three-month average daily dollar trading volume of $5 million.
The index classifies these cloud computing businesses into three buckets: infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS) and software-as-a-service (SaaS). Each company is ranked based on its participation in each bucket. If a company operates in all three, it gets a maximum score of 6 points (3 points for IaaS, 2 for PaaS, and 1 for SaaS). If it doesn’t operate in one of the buckets, it gets a 0 for that cloud computing segment.
Once all companies are ranked, each ranking is divided into the total to establish a weight. No company can carry a weight of more than 4.5% or less than 0.25%. The maximum number of companies in the index is 80, with the index reconstituted and rebalanced on a quarterly basis.
Currently, SKYY has 65 holdings, with four stocks carrying weightings above 4%, including Microsoft at 4.29%. The fund has an average market cap of $26.14 billion, and it charges a reasonable 0.6% fee. Over the past three years, the annualized total return for SKYY is 8.88%.
WisdomTree Cloud Computing Fund (WCLD)
WisdomTree Cloud Computing Fund (NASDAQ:WCLD) is the second of two passively managed cloud computing ETFs. It tracks the performance of the BVP Nasdaq Emerging Cloud Index, an equal-weighted index that follows U.S.-listed stocks of companies operating in the cloud computing industry.
I’ve always liked equal-weight indexes because they give you more of a variety of market caps than cap-weighted indexes. Launched in September 2019, WCLD has $623.4 million in net assets and charges a low 0.45% fee.
New additions to the fund must have at least 15% revenue growth in each of the past two years. To remain in the index, a company must have had at least 7% growth in one of the previous two years. It also must have a minimum market cap of $500 million and a minimum three-month average trading volume of $5 million.
WCLD has an average market cap of $6.73 billion, or about a quarter of SKYY’s average. So, there is a bit of risk involved with the fund. The ETF currently has 70 holdings, with the top 10 accounting for 18% of the total portfolio. It is rebalanced twice a year, in February and August.
Over the past three years, the annualized total return for WCLD is 9.87%, 99 basis points higher than SKYY.
ARK Next Generation Internet ETF (ARKW)
When I can, I always like to include an actively managed ETF, and what better than a Cathie Wood fund? The ARK Next Generation Internet ETF (NYSE:ARKW) got its start in September 2014. Today, it has $1.25 billion in net assets.
The ETF focuses on eight areas of technology: cloud computing (25.3% of the fund), e-commerce (16.8%), digital media (16.5%), blockchain and peer-to-peer (12.5%), big data and machine learning (11.2%), mobile (8.7%), Internet of Things (6.9%) and social platforms (1.9%).
Because actively managed funds tend to be more focused, it’s only got 29 holdings, with the top 10 accounting for 65.2% of the entire portfolio. Wood tends to turn the whole portfolio once every 15 months. The median market cap is $18.2 billion, with price-to-sales (P/S) and price-to-earnings (P/E) ratios of 2.2 and 50.8, respectively.
The fund charges 0.88%, which is reasonable for active management. ARKW’s three-year annualized return is 4.77%.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.