When the first cloud computing exchange traded fund debuted nearly nine years ago, some critics were certain this was too much of a good thing in the niche-y ETF space.
What they weren't certain of was the exponential growth trajectory cloud stocks were about to embark upon. More than $3.7 billion later, the first cloud ETF is more than justified and like other fast-growing corners of the technology sector, cloud is attracting ETF competitors.
These days, there are four dedicated cloud computing ETFs. Proving that there's room for competition and different views in the space, some of the newer entrants debuted last year and are finding rapid success. That includes the WisdomTree Cloud Computing Fund (WCLD), which debuted last September and already has $116.4 million in assets under management.
That's an impressive feat for a thematic fund entering an already populated field. Performance has a way of breeding success. WCLD is up more than 31 percent year-to-date. That's about 1,000 basis points ahead of the second-largest cloud ETF and more than double the 2020 returns of the most senior fund in the category.
Winning With WCLD
WCLD follows the BVP Nasdaq Emerging Cloud Index, an equal-weight benchmark levered to cloud growth. In fact, Bessemer Venture Partners (BVP) mandates that new additions to the index have revenue growth of at least 15 percent over the last two years while current components must have top line growth of at least seven percent in one of the prior two years.
Speaking of growth, the cloud computing market has that in spades.
“From 2008 to 2020, the total market capitalization of the top five publicly traded cloud companies (as measured by market cap) increased by 44 times, from $14 billion to $616 billion,” said WisdomTree in a recent research note. “The market cap of public cloud companies grew 35% annually from 2015 to 2018, above BVP’s 25% expectation. Total cloud market cap reached $1 trillion in 2020, doubling the size of BVP’s original expectation for $500 billion by 2020.”
Good news: plenty of growth is still available for investors considering WCLD. After all, cloud currently represents less than a third of all software sales – a number that can easily swell over the coming decade because of cloud's myriad applications across industries, including e-commerce, financial services, healthcare and more.
The coronavirus pandemic actually shines a light on cloud's growth potential. Working from home is a major driver behind the rise of Zoom (ZM) and Slack (WORK) and Twilio (TWLO) have exposure to this shift, too.
When the work from movement was rising in March, the University of Chicago's Booth School of Business estimated that at least 34 percent of U.S. jobs, ones combining for 44 percent of all income generated in the country, can be done from home.
Potentially bolstering the long-term case for WCLD are that some companies, including Twitter (TWTR), are telling workers they don't need to return to the office even after the virus ebbs. It's also possible that, over time, the work from home movement grows as more companies the environmental benefits (reduced air pollution) and more staffers enjoy reduced costs such as lost time and childcare bills.
Other Opportunities
Beyond work from home, which may or may not be realized on a more extensive basis, automation and data security stand as tangible growth drivers for WCLD going forward.
“Consumers will demand higher data privacy standards, forcing businesses to reduce their 'privacy debt,'” notes WisdomTree. “Many companies do not have the infrastructure to safely collect and store data. BVP envisions a greater need for solutions that help enterprises protect data.
Plus, WCLD has margins in its favor. It's weighted average trailing 12-month gross margin of 70 percent easily tops the S&P 500, the S&P 500 Growth Index and the S&P Software and Services Index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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