The technology sector has been broadly mixed so far this year
due to uncertainty surrounding some of its top players, weak
overseas demand and overall reduction in global information
technology spending. However, one sub-sector - Cloud Computing -
has managed to prosper.
Cloud Computing is a rather under-tapped and flourishing part
of the technology space. This specialized segment of the sector
has been gaining momentum in recent years and represents one of
the few growth opportunities left for developed market
What is Cloud Computing?
Cloud computing is a process by which
data or software is stored outside of a
, but can be easily accessed from anywhere at any time via the
Internet. This revolutionary idea can lower IT costs of companies
by cutting down the need for servers and staff. Per one research
by 2015, 10%
of overall IT security enterprise product capabilities will be
delivered in the cloud.
The huge growth potential of this niche segment prompted
companies such as
), which were initially hesitant to enter this domain, to go for
acquisitions in cloud computing. Competition is heating up in the
space among other big tech players like
), some of which are shifting their focus from low-margin
PC-centric business to the high-margin server, storage and cloud
As a point of reference, IBM is seeing strong demand for its
cloud-based solutions. The company's cloud revenues increased
80.0% in 2012. Buoyed by this robust demand, IBM expects to earn
$7 billion in revenues from cloud-based services by 2015's end
Inside the Cloud Computing ETF
Industry statistics also bear out the relatively bullish
trend. Gartner expects the public cloud services market to
year-over-year in 2013 to reach a total of $131 billion globally.
It also forecasts that from 2013 through 2016, as much as $677
billion will be spent on cloud services worldwide.
How to Play: SKYY
In such a scenario,
First Trust ISE Cloud Computing Index Fund
) - the only pure-play available in the cloud space -- has seen a
solid level of interest from investors, attracting over $100
million within two years of its inception. Also, since its debut,
the fund has returned around 39.0% to investors.
While some broad-based technology-focused
like the Select Sector
SPDR Technology ETF
Vanguard Information Technology ETF
) and the
iShares Dow Jones US Technology ETF
) delivered 9%, 12.9% and 7.8% respectively, the niche player
SKYY delivered more than 25.0% in return in the last one year
In total, the fund holds about 40 securities in its basket. Of
(FB) takes the first spot, making up roughly 4.73% of the assets.
Stellar earnings and subsequent surge in the share price of
) made possible the torrid run in SKYY. Notably, FB shares soared
nearly 50% last month.
Another stock in the portfolio,
) is pushing SKYY higher by attracting new subscribers and
boosting earnings in the process. Some positive trends are also
beginning to appear in yet another constituent - VMware - thus
benefiting the fund greatly.
In terms of industrial exposure, the fund is widely spread
across Software (39.0%), Internet Software & Services
(22.0%), Communications Equipment (14.2%) and Computers &
Peripherals (11.2%) that make up double-digit allocations.
SKYY has a promising exposure profile. Given the solid results
by many companies in this space and the inherent potential of the
Cloud Computing segment, we could see additional gains in the
months ahead (read:
Robotics ETF on the Horizon
So, for risk-tolerant investors seeking a new play on the tech
space, this somewhat unnoticed Could Computing ETF could be an
interesting, albeit volatile, choice to target this
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FACEBOOK INC-A (FB): Free Stock Analysis
ISHARS-US TECH (IYW): ETF Research Reports
NETFLIX INC (NFLX): Free Stock Analysis
RED HAT INC (RHT): Free Stock Analysis Report
FT-CLOUD COMPUT (SKYY): ETF Research Reports
VIPERS-INFO TEC (VGT): ETF Research Reports
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