Cloud technology ETFs on brink of positive perfect storm

May 11th, 2020 | By | Category: Equities

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ETFs providing exposure to cloud companies are expected to sustain their impressive growth trajectory as cloud technology continues to facilitate the switch to remote working and lubricate the wheels of the fourth industrial revolution.

Cloud technology ETFs on brink of positive perfect storm

Anthony Ginsberg, Managing Director at GinsGlobal Index Funds; Timothy Horan, Managing Director and Senior Analyst, Communication & Cloud Services, Oppenheimer & Co.

This is the consensus of Anthony Ginsberg, Managing Director at GinsGlobal Index Funds, and Timothy Horan, Managing Director and Senior Analyst for Communication & Cloud Services at Oppenheimer & Co.

Ginsberg and Horan recently shared their perspectives on cloud technology with an audience of investors in a webcast hosted by ETF Strategy in partnership with HANetf (see Cloud Technology: The ETF Investment Case Updated).

Ginsberg, co-creator of the HAN-GINS Cloud Technology UCITS ETF (SKYY), noted that cloud technology has become the major battleground for Big Tech companies, which are allocating roughly 60% of their IT expenditure to cloud development. Firms have also reportedly been reluctant to cut this budget even in the current downturn.

The significance that tech companies are placing on the cloud is not surprising considering the sector is increasingly permeating our daily lives. From smart cars to smart cities, households to hospitals, factories to farming, cloud technology is being utilized to reduce costs, enhance efficiencies, and fundamentally change the way we interact with the world.

Horan, one of Wall Street’s top-rated technology analysts, also lauded the sector, noting that the coming together of complementary technologies means we’re on the brink of a positive ‘perfect storm’ within the technology sector. Combined with faster speeds from 5G networks, better AI capabilities to harness cloud data, and blockchain technology providing security, Horan predicts the next 30 years will see a technological revolution that easily surpasses the last 30 years.

Further facilitating that growth, Horan highlighted that cloud services can be rapidly scaled up as needed, a feature that became apparent during the massive spike in demand during the pandemic-induced lockdown. Citing the recent example of BT, he said that Amazon was able to convert the company’s entire 70,000 employees online over a single weekend.

Yet this business model flexibility is not the only quality feature of cloud technology companies.

“Cloud companies have systems that have also proved to be reliable in terms of operational efficiency and safeguarding against the risk of cybercrime, leading to a client retention rate well above 90%,” said Ginsberg. “Combine this predictable revenue stream with a relatively low debt burden and you can see why investors find these companies attractive.”

According to Horan, as the cloud technology scene has developed, it has also become more competitive.

“Four years ago, Amazon controlled a 90% market share for cloud services. Now, that’s down to 60%. This is primarily because Microsoft believed in and built out the hybrid cloud, which allowed it to increase its market share from 5% to 30%.

“This more competitive ecosystem is going to be beneficial for cloud growth in the long-term and will support mid- and small-cap companies who are now finding their footing.”

When asked whether cloud technology ETFs would appeal to value-oriented investors, Ginsberg did concede that P/E ratios are potentially stretched, with Amazon’s and Microsoft’s currently at all-time highs. However, he was quick to note that the cloud theme is a secular growth story that warrants higher valuation ratios and that P/E ratios were perhaps not the best way to analyze high-growth technology stocks.

“The long-term outlook for cloud companies is phenomenal,” said Ginsberg. “And we are still at the early stages of the growth story. We are still going to see huge adoption in the future.”

Ginsberg referenced the HAN-GINS Cloud Technology UCITS ETF (SKYY LN), the fund he developed in partnership with white-label platform HANetf, as an effective way to play the theme.

The fund tracks the Solactive Cloud Technology Index, consisting of developed or emerging market companies operating in the field of cloud-based software and services.

The index includes 50 stocks that are most closely related to the theme of cloud computing with selection based on Solactive’s proprietary natural language processing algorithm which identifies thematic exposures in companies using conventional and unconventional data sources. Stocks are weighted by free-float market cap with a single issuer cap of 4%.

Currently, the index is predominantly exposed to companies domiciled in the US with a total weight of around 90% with Europe and Asia making up the rest.

According to Ginsberg, this reflects the US’s current dominance in the cloud technology space, while the index’s methodology leaves open the possibility of capturing the global rise of cloud technology when this trend emerges.

“Europe underestimated the cloud technology revolution,” said Ginsberg. “It is thus lagging a few years behind. But we expect this to change and Europe to catch up with the US in the future.”

Importantly, Ginsberg notes that the index has also been designed to capture a broader exposure to the cloud technology theme. Instead of being overly exposed to the mega-cap cloud providers, such as Amazon, Google, and Microsoft, it caps exposure of any constituent at 4% at rebalancing and also includes a notable allocation to mid- and small-cap firms which may prove to be significant players, or bid targets, in the long-term.

The index also diversifies across the entire cloud value chain, including firms providing software, infrastructure, and platform services.

The ETF is listed on London Stock Exchange, Borsa Italiana, and Xetra and comes with an expense ratio of 0.59%.

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