Cloud computing has been one of the best performing megatrends this year as businesses and people were forced to shift into a working-from-home environment following the rapid spread of coronavirus.
There is one European-listed ETF, in particular, that has shot the lights out and outperformed rival products by some distance, WisdomTree's $203m WisdomTree Cloud Computing UCITS ETF (WCLD).
WCLD has returned 52.5% in 2020, the third most across all European-listed ETFs, versus 18.6% for the Nasdaq, the main technology index, and -2.6% for the iShares MSCI World UCITS ETF (IWRD), as of 12 August.
There are two other ETFs on the European market that offer direct exposure to cloud computing, the $357m First Trust Cloud Computing UCITS ETF (FSKY) and the $31m HAN-GINS Cloud Technology UCITS ETF (SKYY).
However, both have failed to capture the significant upside seen from WisdomTree’s WCLD with FSKY returning 25.2% this year while SKYY is up 13.4%, as of 12 August.
There are a number of reasons why WCLD has been able to deliver such strong performance. The first, Chris Gannatti, head of research, Europe, at WisdomTree, said was the decision to work with Bessemer Venture Partners (BVP), a firm that is an expert within the cloud computing space.
The firm helped construct the BVP NASDAQ Emerging Cloud index which is able to offer a purer play on the cloud megatrend by removing companies with other business interests such as Amazon and Microsoft.
For First Trust’s FSKY, Amazon and Microsoft are the top two weightings with 4.26% and 4.19%, respectively, while Apple and Amazon are in SKYY’s top 10.
Although Amazona and Microsoft, in particular, are big players within the cloud computing space, Gannatti stressed the issue is the majority of their revenues do not derive from cloud computing.
Having big companies such as Amazon within thematic ETFs also creates the issue of doubling down on exposure. If an investor holds an S&P 500 ETF and FSKY or SKYY, they will hold Amazon in both buckets of their portfolio, something they could potentially be looking to avoid.
He added BVP only look to include companies in the index when over 50% of their revenues is directly from cloud computing.
These companies, such as Zoom and Fastly, are the ones that have benefitted the most from the changing environment and therefore has driven WCLD’s outperformance.
“WCLD has never included the big companies which sets the stage to be extremely different from more generic strategies that have them as their biggest weightings,” Gannatti continued.
Furthermore, Gannatti said the decision to equal weight each company within the index also has driven returns.
An equal weight approach means if one company with a smaller market cap significantly outperforms, then the ETF, which rebalances semi-annually, will capture this performance more so than a market-cap weighted strategy.