The emergence of cloud computing has been one of the most successful investment themes over the past decade, and it promises to create wealth for investors long into the future.

That’s why we believe First Trust Cloud Computing ETF (FSKY) is not just a play for the next few years, as we (hopefully) recover from economic hardship, but for the next decade at least.

It’s a simple, low cost way to get exposure to the key companies providing cloud computing services.

WHAT IS CLOUD COMPUTING?

Cloud computing involves the delivery of computing services such as servers, storage and databases over the internet (‘the cloud’). Businesses around the world are adopting this method of working, which means big earnings growth for the companies providing cloud services.

Look at the top S&P 500 companies and you’ll find it littered with businesses that are deeply embedded in cloud computing, helping drive the astonishing success of Alphabet (GOOG:NASDAQ), Amazon (AMZN:NASDAQ) and Microsoft (MSFT:NASDAQ), among others.

Apple’s (AAPL: NASDAQ) gradual shift from hardware to software services and apps is one of the major reasons why investors have rallied behind the story in recent years and throughout the Covid outbreak. That has earned the business a $2.48 trillion price tag, making it the world’s most valuable listed business.

Tesla (TSLA:NASDAQ), essentially a car maker and energy company, updates all of its in-car software via the cloud, and collects mountains of valuable driver data this way.

EARLY IN THE ADOPTION JOURNEY

Investors should not think cloud computing is a bus already missed; this is a growth theme widely predicted to have decades of expansion.

For example, Fortune Business Insights forecasts global cloud revenues will top $760 billion by 2027. That’s bigger than Belgium’s GDP last year, based on World Bank figures, or nearly twice the size
of Denmark’s.

This stunning growth trajectory implies annual average compound growth of 18.6% a year between 2020 and 2027, according to the Cloud Computing Market Size report put together by Fortune. The study estimated global cloud revenues were approximately $199 billion in 2019.

Yet as the eye-popping forecasts indicate, there is a lot more to come, say experts. ‘Cloud is as hot a topic as ever, but the move by companies onto the cloud, in our view, is only the beginning of the digital revolution,’ says Indraneel Arampatta, an analyst at technology website Megabuyte.

The Covid pandemic, various lockdown measures and the swathe of organisations that had been forced to work from home have simply accelerated a shift that was already happening.

Working from home naturally leans heavily on the cloud, with professional-level communications, including text, video and voice calls, needed as well as remote access to critical applications and super-fast mobile and broadband networks.

In a (largely) post-pandemic world, it has become clear that the cloud has touched massive swathes of our economy and society, with many of the changes to our day-to-day lives here to stay, from how we use financial services and order shopping to keeping in touch with people or consume entertainment. For example, Netflix (NFLX:NASDAQ) simply couldn’t exist without the cloud.

FIRST TRUST ETF OPTION

The First Trust Cloud Computing ETF is one of the larger funds for this theme available to UK investors. It charges 0.6% a year and it takes stakes in each of its benchmark ISE CTA Cloud Computing Index stocks to mirror the performance.

Its investable universe, initially filtered for minimum market cap and free float limitations, is broken down into three buckets: pure plays, non-pure plays and broad technology conglomerates. This offers investors access to both the known and unknown names associated with cloud computing.

The portfolio applies a score to the different areas of the cloud universe – software-as-a-service, platform-as-a-service and infrastructure-as-a-service pure play firms. The ETF rebalances the portfolio quarterly, while it embraces less mature, smaller companies where others might stick to larger cloud plays.

For example, the average sales growth of companies in the First Trust Cloud Computing ETF is roughly four times that of the S&P 500. This means few of its fastest-growing investee companies feature in the S&P 500 at all.

Like many tech-related funds, performance has struggled this year as investors became worried about inflation and how high interest rates might go. This impacts how the market treats investments where future cash flows are likely to be much higher than they are today.

We can’t rule out that performance will struggle for longer than we anticipate, although performance data seems to suggest good growth potential over a multi-year cycle.

The ETF’s share price is down 25.5% this year, holding up marginally better than the Nasdaq Composite (down 27.1%). But the three-year gain of 23.9% is perhaps a better illustration through good years and bad. Since inception in December 2018, the ETF has increased by 44.3% in value.

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