The first cloud computing ETF has arrived. On Wednesday (7/6/11), the First Trust ISE Cloud Computing Index Fund (SKYY) was listed for trading on the NASDAQ. Part of the reason investors had to wait so long is that like its namesake, cloud computing is somewhat amorphous, with no clearly defined boundaries and no GICS industry code. Additionally, many of the biggest players are not considered “pure plays” in the cloud computing space.

Given these hurdles, the underlying ISE Cloud Computing Index takes what appears to be a very reasonable approach. First, all eligible securities are classified into one of three business segments. Next, each segment receives a fixed or quantifiable allocation, and finally, the stocks within each segment are equally weighted. The resulting breakdown looks like this:

  • Technology Conglomerate Cloud Computing Companies: These are the large broad-based companies that indirectly utilize or support the use of cloud computing technology. This segment receives only a 10% weighting and currently consists of just four companies, each receiving a 2.5% allocation.
  • Non Pure Play Cloud Computing Companies: These are the companies that provide goods and services in support of cloud computing. This segment’s allocation is determined by its relative market capitalization versus the market cap of all three segments. It currently has about an 11% allocation, with the 13 stocks equally weighted at around 0.8% each.
  • Pure Play Cloud Computing Companies: These are the companies that are direct service providers for “the cloud” (network hardware/software, storage, cloud computing services) or companies that deliver goods and services that utilize cloud computing technology. This segment receives the remainder of the allocation, which is currently about 79%. It is spread across 23 stocks, with each receiving about a 3.4% weighting at the last rebalancing.

We’ve been strong proponents of cloud computing. Aided by a strong bull market, the six cloud computing stocks we named in March of 2009 have climbed an average of 316% (+83.4% annualized) through 7/7/11.

In our January 2010 Cloud Computing: The Next Big Thing In Technology article, we argued that “cloud computing should generate impressive returns for investors in the coming years, even though there isn’t a cloud computing ETF yet.”

For those not familiar with cloud computing, First Trust put together an Investor Guide (pdf) that provides an excellent primer on the subject. The following excerpts are from the guide:

“The phrase ‘cloud computing’ originates from the cloud symbol used by flow charts and diagrams to symbolize the Internet [services connected via telecommunications], dating back to the 1960s. Although the image of a cloud to symbolize the Internet is nothing new, cloud computing as a service is still in its infancy.

“According to the National Institute of Standards and Technology, cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources (e.g., networks, servers, storage, applications and services) that can be rapidly provisioned and released with minimal management effort or service provider interaction.”

SKYY will have an expense ratio of 0.60% and the industry breakdown comes in at Software 32.5%, Internet Software & Services 22.6%, Communications Equipment 16.8%, Computers & Peripherals 11.2%, Internet & Catalog Retail 7.8%, IT Services 7.1%, and Other 2.1%

The largest of the 40 holdings includes TIBCO Software Inc. (TIBX) 3.8%, Aruba Networks, Inc. (ARUN) 3.8%, Teradata Corporation (TDC) 3.7%,, Inc. (AMZN) 3.6%, Open Text Corporation (OTEX) 3.6%, Netflix Inc. (NFLX) 3.5%, Rackspace Hosting, Inc. (RAX) 3.5%,, Inc. (CRM) 3.5%, Informatica Corporation (INFA) 3.5%, and F5 Networks, Inc. (FFIV) 3.5%.

Additional information:

Disclosure covering writer, editor, and publisher: Long NFLX. No positions in any of the fund companies or ETF sponsors mentioned. No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.