Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the cloud-computing industry to grow over the coming years, the First Trust ISE Cloud Computing Index ETF (Nasdaq: SKYY) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously.
The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The First Trust ETF's expense ratio -- its annual fee -- is 0.60%. The fund is very small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF doesn't have much of a performance to assess, as it's very young. Still, it's the future that counts far more than the past, and as with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Many major cloud-computing companies did not perform well over the past year, but they could see their fortunes change in the coming years.
Acme Packet (Nasdaq: APKT), for example, plunged 78%, partly due to lowering near-term expectations. Still, it boasts 57% of the session border controller market and has a promising voice-over-LTE network. Bears don't like cutbacks in telecom spending that can hurt Acme, but bulls like its strong profit margins and clean balance sheet.
Data storage specialist NetApp (Nasdaq: NTAP) sank 45%; it reported lumpy earnings in recent quarters, but revenue consistently rose. Profit margins are solid, with net margins recently near 10%, but they, too, have zigged and zagged. Still, demand for data storage seems assured for quite a while, and NetApp is promising and generating plenty of free cash flow.
Cloud-computing company VMware (NYSE: VMW) shed 19%, but management has been raising expectations for this year's performance as demand grows for storage in the sky. VMware is selling cloud software and also applications that run on it, and its service sales have been growing briskly. The company faces competition, though, from the likes of Amazon.com and Citrix.
Meanwhile, data storage titan EMC (NYSE: EMC), which owns a big chunk of VMware, fell 13%. It was recently recommended by analysts at Cantor Fitzgerald for its recurring revenue and aggressive channel expansion. The company has seen success with its cloud offerings and has particularly high hopes for them in China, where it employs thousands.
The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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