Money Rains on a Cloud ETF

A new exchange-traded fund focused on cloud computing is off to a strong start with an investment strategy that differs from an established rival’s.

Global X Cloud Computing

(CLOU) ETF, which launched April 12, has already drawn about $475 million of inbound investment flows. With market gains, the fund now has a shade over half a billion dollars in assets.

The fund “connects with a theme that resonates well with investors,” says Todd Rosenbluth, senior director of ETF and mutual-fund research at New York-based investment-research firm CFRA.

Cloud computing is a fast-growing part of the technology industry. It refers to the use of remote data-storage and data-processing services accessed through the internet. For instance, Google’s Gmail accounts use the cloud, and

Amazon.com
Inc.

offers internet access to various software.

The Global X fund has succeeded despite coming to market years after the first cloud-computing ETF and charging more in fees than that pioneering fund. The $2.2 billion

First Trust Cloud Computing

ETF (SKYY), launched in 2011, has annual expenses of 0.60%, compared with 0.68% for the Global X fund.

“Typically, when there is a second mover that has success, it is when they are competing with a lower-cost product,” says Mr. Rosenbluth. He also notes that the money flowing into the Global X fund doesn’t appear to have come from one institutional investor but rather is apparently the result of broad investor interest. “The flows didn’t all happen in one day,” he says.

So why is Global X grabbing so much money in such a short time? That may have much to do with the way the fund weights its portfolio. “It is trying to provide pure-play exposure” to cloud computing, says Jay Jacobs, head of research and strategy at New York-based ETF provider Global X.

In a portfolio of cloud stocks, many companies will also have other sources of revenue, especially the largest companies. For instance, Amazon, Google parent

Alphabet

and

Microsoft

are major players in cloud services, but they also do a lot of other commerce in unrelated areas.

In building its portfolio, the Global X fund decided to go a different route than the First Trust fund. Rather than weight its holdings by the market capitalization of the companies it invests in, it decided to restrict the holdings of some of the larger companies. The result is a different weighting in the holdings of the Global X fund versus the First Trust fund. For instance, Microsoft, Amazon and Alphabet together make up 5% of the holdings in the Global X fund, versus 14% in the First Trust fund.

“We are choosing not to be dominated by the tech companies that have a diverse revenue base,” says Mr. Jacobs. “We include them, but we cap them.”

Mr. Constable is a writer in Edinburgh, Scotland. He can be reached at reports@wsj.com.

Copyright ©2019 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the August 5, 2019, print edition.

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