Market Overview

Guess Which Stocks Are Leading the Cloud Computing ETF

Just enough folks know there is a cloud computing ETF.

That is to say the First Trust ISE Cloud Computing Index Fund (NYSE: SKY) has nearly $117 million assets in under management, comfortably ahead of the $100 million watermark that so many ETF analysts and pundits put so much faith into despite the lack of empirical evidence that an ETF's AUM total is anything more than a superficial metric.

The important point is investors can tap the cloud with SKYY. Now just over two years old, SKYY's staying power and ability to accumulate assets have validated an ETF that was heavily criticized as being to much of a niche play upon debut.

Related: Don't Forget About The Cloud Computing ETF.

The really important point about SKYY is that the ETF is up 16 percent in the past 90 days. Explaining SKYY's recent success is easy. And surprising. Surprising because the stocks that have ignited the ETF's rally are not the first ones investors well-versed in cloud computing think of when they think of this sub-sector. Facebook (NASDAQ: FB) and Netflix (NASDAQ: NFLX) are SKYY's two largest holdings, combining for about 9.5 percent of the fund's weight.

Netflix has previously helped SKYY shoot higher and since the stock has more than tripled than tripled this year, it has been helping SKYY quite a bit.

To be precise, Facebook is 5.28 percent of SKYY's weight and Netflix is 4.18 percent. In the case of Facebook, there are several other ETFs with heftier allocations to Mark Zuckerberg's company.

Although about 80 ETFs hold shares of Netflix and over five percent of the company's $18.1 billion market capitalization is held in those ETFs, only SKYY and the PowerShares NASDAQ Internet Portfolio (NASDAQ: PNQI) have "decent" weights to the stock. That will presumably change as the market value on Netflix expands, but for now ETF investors that want some Netflix need to opt for SKYY or PNQI.

Facebook and Netflix exposure has helped SKYY hit a string of new all-time highs. Still, some may wonder how these stocks even qualify for admission to a cloud computing ETF.

It is not a secret. SKYY's index sets aside 10 percent of its weight to technology conglomerate companies and makes room for "Non Pure Play Cloud Computing Companies: Companies that focus outside the cloud computing space but provide goods and services in support of the cloud computing space," according to First Trust.

If there is a knock on SKYY, and it should be said knocking this ETF has not been the way to go, it is valuation. Not surprising given that Netflix is not exactly a cheap stock. Nor is Amazon (NASDAQ: AMZN), another 3.1 percent of SKYY's weight. SKYY sports a P/E ratio of almost 27, a price-to-book ratio of 3.75 and a price-to-sales ratio of three, according to First Trust data.

For more on ETFs, click here.

Disclosure: Author owns none of the securities mentioned here.

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