The First Cloud Computing ETF Is Here

By Matthew McCall | July 05, 2011 AAA

The first ETF dedicated solely to the cloud computing industry was launched this week by First Trust. The highly anticipated First Trust ISE Cloud Computing Index ETF (Nasdaq:SKYY) began trading on Wednesday.
The ETF focuses on three cloud computing-related business segments: pure play cloud computing companies, non-pure play cloud computing companies, and technology conglomerate cloud computing companies. Only 10% is allocated to the technology conglomerate cloud computing companies, with the remainder in the other two segments.

As of July 5, 2011, the top holdings included Aruba Networks (NASDAQ:ARUN), TIBCO Software (NASDAQ:TIBX), Teradata Corp (NYSE:TDC), Amazon.com (NASDAQ:AMZN) and Informatica (NASDAQ:INFA). There are a total of 40 stocks in the ETF and the annual expense ratio is 0.60%.

TUTORIAL: 20 Investments To Know

The Top Holdings
ARUN provides enterprise networks that securely connect local and remote users to corporate IT resources worldwide. By concentrating on the wireless aspect of the cloud, the company is moving with the progression of remote computing. Even though the company is well off the April high, it still trades with a high forward P/E ratio of 45.6 and price-to-sales of 8.8. The stock is clearly not a value play, but is well positioned within the cloud.

TIBX provides enterprise software that helps companies in the areas of service-oriented architecture and business process management. One of their focuses is on the cloud and allowing customers to build their own cloud and access software in that manner. The stock recently hit a new decade-high and is up over 50% in 2011. Fundamentally, the company trades with a forward P/E ratio of 27.9 and price-to-sales of 6.0. Waiting for a pullback is the best strategy at this time.

Also up about 50% in 2011 is TDC, which is currently trading at the highest level ever. TDC is the world's largest company solely focused on creating enterprise agility through database software, enterprise data warehousing, data warehouse appliances and analytics. To go along with the strong chart are decent fundamentals with a forward P/E ratio of 24.2 and a price-to-sales of 5.2. These are considered decent because the company is a solid growth story.

An oldie but goodie is AMZN. The online retailer is also becoming a major player in the cloud computing space. With their Elastic Cloud Compute (EC2), the company is offering a web service that provides compute space in the cloud. Not only have investors been buying into the strong sales of the retail giant, but now there is reason to buy the stock for cloud exposure. That is why it should not be a surprise the stock is trading at the best level ever. Valuation-wise, the stock has a high forward P/E ratio of 55.9 with price-to-sales coming in at 2.6. Similar to most stocks hitting new all-time highs, the best buying strategy is waiting for normal weakness.

The Bottom Line
If you ask me, the future of the cloud is very sunny, no pun intended. The movement from old school storage to remote storage via the cloud has only just begun. There are many more breakthroughs around the corner, and by investing in an ETF that gives investors exposure to the entire industry, it lowers the company-specific risk of a single stock. (To learn more about cloud computing, see Is Cloud Computing An Investable Trend?)

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