Why dark clouds hang over the WisdomTree Cloud Computing ETF

Soaring demand for cloud computing technologies during the coronavirus pandemic is continuing to boost growth in the WisdomTree Cloud Computing UCITS ETF [WCLD]. 

Despite hitting a low of $37.23 on 14 July, WisdomTree’s Cloud Computing ETF gained 109.8% throughout 2020.

The WisdomTree Cloud Computing ETF has been boosted by the accelerated shift of businesses and consumers adopting cloud software during the pandemic to improve the efficiency of remote workers.

The WisdomTree Cloud Computing ETF continued its stellar performance in the early weeks of 2021, climbing 14% to an intraday high of $61.05 on 16 February. 

  

However, dark clouds rolled over the WisdomTree Cloud Computing ETF during the next two months, as fears of rising inflation and interest rates hit high growth technology stocks.

The fund dropped to $44.50 at the close on 13 May but has since recovered above the $55 mark. The WisdomTree Cloud Computing ETF was up 5.5% in the year-to-date at $56.51 on 25 June.

 

A source of disruption

The WisdomTree Cloud Computing ETF, launched in September 2019, invests in companies primarily involved in providing cloud software and services. The fund tracks the BVP Nasdaq Emerging Cloud Index.

The firm believes that cloud computing represents a “significant source of disruption not only in the technology sector, but in the investment world”. It says cloud computing has become ingrained in nearly every aspect of our lives. 

The WisdomTree Cloud Computing ETF had a year-to-date total daily return of 5.65% on 28 June, according to Yahoo Finance. As of 25 June, it had $750m assets under management. In comparison, the Global X Cloud Computing ETF [CLOU] had a total daily return of 2.65% and total net assets of $1.4bn in the same period. 

  

The WisdomTree Cloud Computing ETF had 58 holdings as of 25 June. Surprisingly, it does not have holdings in the biggest cloud companies such as Microsoft [MSFT], Amazon [AMZN] or Google [GOOGL]. Instead, it is focused on smaller pure-play stocks.

Asana [ASAN] had the biggest weighting in the fund at 2.74%, followed by Box [BOX] at 2.48%, Dropbox [DBX] at 2.34%, Cloudflare [NET] at 2.32% and Proofpoint [PFPT] at 2.27%. Other key holdings include Adobe [ADBE], HubSpot [HUBS], DocuSign [DOCU] and Shopify [SHOP].  

Shares in Asana, which produces project management services, have climbed 112.3% in the year-to-date to $62.73 on 25 June. Despite the company reporting a first-quarter loss of $0.21 per share at the start of June, revenues rose 61% from the same period last year to $76.7m.  

Dustin Moskovitz, CEO of Asana, explained in a statement alongside the financials that cloud computing solutions are “essential” no matter whether teams are remote or in offices.

Shares in cloud-based security provider Cloudflare have also risen 38% in the year-to-date (through 25 June) amid positive first-quarter revenue growth. Its revenues grew 51% year-over-year to $138.1m during the quarter.

Increased demand for e-signatures, driven by administrators, lawyers and businesses finalising deals and contracts remotely, boosted the bottom line of DocuSign as well. The stock gained 25.6% in the year to date (through 25 June).

 

A crucial technology for reopening

The WisdomTree Cloud Computing ETF isn’t expected to stop booming any time soon based on positive forecasts for cloud computing growth. According to ReportLinker, the global Software as a Services market is poised to grow at a CAGR of more than 11% between 2021 and 2025. It will be driven by the increased use of mobile apps, the rising need for API applications and continued adoption of cloud services.

“Cloud computing has been a boon for companies that have been able to capitalise on the increased work-from-home labour force amid the COVID-19 pandemic. As more countries continue to undergo a recovery around the globe, cloud computing will be a crucial sector in assisting recuperating economies,” Tom Lydon, president of Global Trends Investments, wrote in ETF Trends.

There are uncertainties ahead for the WisdomTree Cloud Computing ETF, particularly around whether businesses in hard-hit sectors, such as retail and airlines, will allocate resources to technology in the months ahead. In addition, will there be such a heightened need for cloud services when employees return to offices?

“Cloud computing has been a boon for companies that have been able to capitalise on the increased work-from-home labour force amid the COVID-19 pandemic. As more countries continue to undergo a recovery around the globe, cloud computing will be a crucial sector in assisting recuperating economies” - Tom Lydon

 

The continued pull-back from growth stocks towards value at a time of higher inflation may also continue hurting the WisdomTree Cloud Computing ETF’s performance.

Analysts, however, remain bullish with an average 12-month target, according to BNK Invest, of $60.07.

Dave Ives, a technology analyst at Wedbush Securities, believes tech stocks have a further 25% to 30% gain before the year is out. “While valuations will continue to be an emotional bull/bear debate, the fundamental growth on the horizon for these next-generation technologies is unprecedented as this Fourth Industrial Revolution begins to take hold,” he wrote in a note seen by Fortune.