5 Cloud ETFs to Buy Now

Cloud computing is the hottest tech market trend this side of artificial intelligence, and — unlike AI — it’s already a big business for which corporate users already have a good use case. So, naturally, some exchange-traded funds, or ETFs, have sprung up to give investors a way to bet on the shift of computing dollars away from servers that companies manage in-house to hardware and software that’s centrally managed by third-party administrators to save money and add flexibility.

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And the cloud industry is still growing. The U.K.-based consultancy MarketsandMarkets Research says cloud computing will grow about 15.1% annually, becoming a $1.26 trillion market by 2028. Little wonder that a lot of the hottest stocks in tech during the 2019 to 2021 runup were connected to cloud computing, with the Indxx Global Cloud Computing Index rising 117% from March 2020 to its peak in fall 2021 before dropping 40% in 2022. It’s been on a fairly steady climb since then, however, reaching a new all-time high in early 2024.

The list of cloud-specialized ETFs is short, but with tech giants like Amazon.com Inc. (ticker: AMZN), Microsoft Corp. (MSFT) and Alphabet Inc. (GOOG, GOOGL) emerging as top cloud vendors, investors with a casual interest can get some exposure in broader technology funds or even S&P 500 index funds. But for those who want to put a slice of their money behind cloud computing more directly, these are some of the top choices:

Cloud ETF Expense Ratio
Fidelity Cloud Computing ETF (FCLD) 0.39%
iShares Future Cloud 5G and Tech ETF (IDAT) 0.47%
First Trust Cloud Computing ETF (SKYY) 0.60%
WisdomTree Cloud Computing ETF (WCLD) 0.45%
iShares U.S. Tech Breakthrough Multisector ETF (TECB) 0.40%

Fidelity Cloud Computing ETF (FCLD)

By Fidelity standards, this fund is small at under $80 million in assets — but what it lacks in size, it makes up for in a top-notch investment process and management team.

The fund has returned 45.6% over the past year and more than 53% in 2023. That’s the good news. The bad is that the 3-year-old fund had a rough 2022, and its lifetime return is less than 1%. But 2022 was hard on the entire tech industry, so it may not be fair to hold it against FCLD.

Morningstar’s analysts still believe in it. They give the fund a gold rating, indicating they have the highest conviction it will outperform its index or most peers in the near future.

The fund says its approach is to “reflect the performance of a global universe of companies across the market capitalization spectrum that provide products or services enabling the increased adoption of cloud computing.” In practice, that means holdings in 59 companies, more than 90% of which are based in the U.S. The biggest holdings are in software or software-as-a-service businesses like Oracle Corp. (ORCL), Microsoft and Salesforce Inc. (CRM), but real estate plays like Equinix Inc. (EQIX) and Digital Realty Trust Inc. (DLR) also make the top 10.

The fund’s advantages include a relatively low expense ratio of 0.39% of assets. But whether it’s a good bet will depend on the development of the market and whether the proprietary index Fidelity uses to guide the fund can beat the path of tech stocks generally.

One aspect that may help it stay ahead of the curve is an above-average sustainability rating. This gives it lower exposure to environmental, social and governance, or ESG, risk relative to its peers.

Expense ratio: 0.39%

iShares Future Cloud 5G and Tech ETF (IDAT)

Another cloud computing ETF that Morningstar has a high conviction about is the iShares Future Cloud 5G and Tech ETF. The analysts give it a gold badge for its “sound investment process and strong management team.”

IDAT tracks an index that targets companies that provide products, services and tech related to cloud computing and 5G. Unlike Fidelity’s fund, which is almost entirely North America-based, IDAT’s index takes a global view by looking for companies in both developed and emerging markets.

While it is still more than three-quarters U.S.-based, you’ll also find exposure to Taiwan, Japan, China and even Finland, among others, in this ETF. It is by and large an information technology fund, but you’ll also get some token communication, real estate and materials exposure here. Top holdings include Nvidia Corp. (NVDA), Micron Technology Inc. (MU) and Pure Storage Inc. (PSTG).

IDAT’s one-year returns aren’t quite as impressive as FCLD’s at 25.6%, but it also fared better in 2022, netting it a higher overall return since inception compared with FCLD. And they debuted in the same year. Does this mean IDAT is a safer bet during times of uncertainty? Perhaps.

Expense ratio: 0.47%

First Trust Cloud Computing ETF (SKYY)

This $3 billion fund weights its portfolio by whether each of its holdings is active in each part of the cloud computing business — infrastructure, software and services — with a rule saying that no stock can be more than 4.5% of the fund. Relatively pure plays like Pure Storage join more diversified companies like Amazon and International Business Machines Corp. (IBM) at the top of the list.

This results in a lower weighting for companies like ServiceNow Inc. (NOW) and Atlassian Corp. (TEAM), which are considered fairly pure cloud plays but aren’t involved in all three segments that First Trust tracks. About half of all fund assets are committed to software companies and one-fifth are invested in IT services.

Performance here reflects the cloud industry’s recent history. The fund is up almost 43% over the past year, but three-year returns have been held down by the 2021 to 2022 bust. Ten-year performance averages 13.3%, beating the market benchmark.

Morningstar believes it will outperform its index or most peers in the near term, however, giving the fund a bronze badge and three stars.

Expense ratio: 0.6%

WisdomTree Cloud Computing ETF (WCLD)

This $602 million fund tracks an index of emerging public cloud companies, meaning its core bet is on high growth, high risk and high reward. The index is also equally weighted, meaning the fund skips cloud market leaders Alphabet, Microsoft and Amazon, in favor of database platform MongoDB Inc. (MDB), customer-experience software maker Freshworks Inc. (FRSH) and cybersecurity company Cloudflare Inc. (NET).

The fund’s issue is that its 2019 founding was ill-timed. Shares zoomed from about $20 in March 2020 to more than $65 in late 2021, then crashed, and have only recovered to about $30.

The fund’s path forward depends on whether smaller tech firms regain their mojo faster or slower than Big Tech. That’s especially true for WCLD because it’s equally weighted: If tech goes through another period where outperformance is concentrated in giant companies, a capitalization-weighted scheme may be a better bet than this fund or the index on which it’s based.

Morningstar gives it a bronze rating and two stars, so its analysts at least have faith in WCLD’s near future.

Expense ratio: 0.45%

iShares U.S. Tech Breakthrough Multisector ETF (TECB)

Rounding out this list of top cloud computing ETFs, we return to another five-star and gold-rated fund by Morningstar: the iShares U.S. Tech Breakthrough Multisector ETF. This one is a less cloud-focused ETF than other names on this list, however, as you might have guessed by the “multisector” reference in its name. It tracks companies that could benefit from a number of breakthrough technologies, including cloud technology, but also AI, robotics, genomics, immunology, cybersecurity and data tech. So if you’re feeling bullish about many aspects of tech beyond cloud computing, this could be the fund for you.

The more diversified approach to tech means that you get more exposure to sectors other than IT. For instance, nearly 14% of its holdings are in the communications sector and another 11.5% are in health care, something you don’t see much of in cloud computing ETFs. Of course, more than half the fund is still IT, but what can you expect of a tech fund?

The top holdings are still many familiar faces, with Nvidia, Meta Platforms Inc. (META) and Amazon topping the list. But right below these tech giants is health care company Merck & Co. Inc. (MRK). You’ll also find some financial firms on the list, like Visa Inc. (V) and Mastercard Inc. (MA).

Like others on this list, TECB had a strong one-year performance with nearly a 44.5% total return since this time last year. Its three-year performance isn’t quite as strong at 11.1%, but again, this is par for the course for tech ETFs with the rocky start to the 2020s. Just remember that Morningstar has a strong conviction that the near future is bright for TECB.

Expense ratio: 0.4%

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5 Cloud ETFs to Buy Now originally appeared on usnews.com

Update 04/17/24: This story was previously published at an earlier date and has been updated with new information.

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