WCLD - WCLD: There Are Likely Better Ways To Capitalize On Cloud Computing Expansion

2023-03-29 18:34:54 ET

Summary

• WCLD invests predominantly in technology stocks within the United States.
• Businesses and individuals alike continue to find uses and merits within the cloud, fostering opportunities for this system’s growth.
• Though forecasts for the cloud are strong, this ETF might have a harder time benefiting from the cloud's future growth as well as hedging any macroeconomic pitfalls along the way.

I rate the WisdomTree Cloud Computing ETF ( WCLD ) a sell. Cloud computing is a revolutionary phenomenon that has gained a lot of traction in recent years. This system is especially renowned for its ability to enhance the safety, scalability, and cost-efficiency of many businesses' movements and operations. However, the cloud computing industry is not recession-proof, and this ETF (exchange-traded fund) certainly isn't. Therefore, I discern that WCLD might have an especially adverse reaction to future rate hikes, setting it even further apart from the market and the rest of its industry.

Though my long-term view of the technology sector and the cloud computing industry is generally bullish, it's hard for me to rate technology ETFs anything better than a hold at the moment. As technology firms often have high expenses, elevated inflation is likely to only further apply pressure to growth and profitability. In this same regard, though WCLD is a sell now, its rating could change in the coming months as I follow its trajectory through the future macroeconomic environment.

The cloud offers numerous benefits and opportunities to individuals, and I could see it soon becoming a more integral part of society than it already is. Therefore, many investors may desire long-term exposure to this growing industry through cloud ETFs. But at the same time, investors may have an easier time attaining quality exposure with less procyclical, less volatile ETFs than WCLD.

Strategy

WisdomTree Cloud Computing ETF follows the BVP Nasdaq Emerging Cloud TR USD Index and employs a representative sampling technique. This ETF invests in growth and value stocks across an array of market capitalizations. However, WCLD's holdings generally might be more associated with growth. This is because the technology sector is mostly characterized by rapid growth and innovation, with less emphasis on value. This could also explain why this ETF does not pay a dividend.

Holdings Analysis

WisdomTree Cloud Computing ETF's holdings are primarily in technology stocks across cloud computing sectors. These companies are also located exclusively within the United States. This makes this ETF quite narrowly focused in terms of both company roles and geographical location.

This ETF allocates 18% to the top 10 holdings while the top 25 also comprise 41% in a fund of 70 stocks. These allocations are decently dispersed, with not one single holding responsible for more than 2% of the total portfolio. WCLD could be considered somewhat top-heavy, but lesser than many other ETFs I have covered. Therefore, I believe concentration risk isn't a primary concern within WCLD, but that is also up to the investor's personal preferences.

Strengths

The cloud computing industry is well-positioned for growth in the coming years. The United States cloud computing market is forecasted to grow to over $1.5T by 2030 at a CAGR of 13%. This growth could potentially increase returns in those who own WCLD.

New cloud computing trends could well emerge and grow throughout the rest of this year and further on, shining light on the extensive possibilities for individuals and businesses within the cloud. Such trends include but are not limited to cloud security, serverless computing, and blockchain.

In addition to displaying what the cloud can offer, such trends may create opportunities for potential collaborations between the cloud and other technological phenomena like fintech. I discuss this in further detail in the opportunities section of this article.

Weaknesses

WCLD has mostly underperformed its potential alternatives for almost a year now. It is also somewhat hard to see this trend reversing as the broader market and the technology sector proceed into treacherous territory amid fear of a recession and future rate hikes.

From the chart above, one might deduce that this ETF could be more procyclical than potential alternatives. This could also explain WCLD's striking volatility. Both this ETF's standard deviation and annualized volatility are slightly higher than that of potential alternatives like the Global X Funds - Global X Cloud Computing ETF ( CLOU ) and the First Trust Cloud Computing ETF (SKYY). Therefore, market fluctuations might direct investors more towards funds like CLOU and SKYY rather than WCLD.

This ETF also does not pay dividends. This could deter value investors while also placing additional emphasis on growth. As the recent bear market has already suppressed growth in many companies, WCLD may have a hard time generating attractive returns.

Opportunities

The cloud computing industry could benefit from developments in fintech and insurtech. Both fintech and insurtech have strong growth forecasts and could be quite influential as society digitalizes. As fintech and insurtech expand, both may look to cloud computing services to increase storage and computing power. This could also allow cloud computing enterprises to create specialized solutions that are directed at enhancing the process of online banking, trading, and other payment transaction mechanisms for their users.

In the event of future economic restoration, the market could see an increase in mergers and acquisitions (M&A) activity. Cloud computing enhances the quickness and efficiency of the M&A process. Specific ways in which the cloud could benefit emerging companies include providing cloud security, increasing scalability, and assisting in building a larger remote workforce.

Threats

The cloud computing industry is currently suffering from an ongoing talent shortage , which has left many job positions unfilled. Furthermore, those that are hired are simultaneously at risk of getting laid off. This is because high interest rates have made it hard for many technology companies to adequately compensate their workers. This overall situation could hinder cloud innovation, reduce the quality of services, and even create new security concerns. Given how hard growth already is amid the current economic conditions, a shortage of talent may only further jeopardize it.

As many technology companies are continuously forced to cut back on spending, a recession could significantly hurt this ETF's profitability. Given that WCLD is already underperforming its peers, reduced profitability could widen the gap even further.

Conclusions

ETF Quality Opinion

WisdomTree Cloud Computing ETF provides narrow exposure to the cloud computing industry, which could attract many investors in the long term. I believe many will seek to benefit from this system's evolving capabilities and opportunities. Cloud ETFs could especially gain popularity when the outlook improves for both the greater market and the technology sector. This ETF is also very nascent, with not even four years passed since its inception. That being said, though it may not be favorable at the moment, it also might be yet to display its true potential. For these reasons, I am eager to follow WCLD in the coming periods.

ETF Investment Opinion

I rate WisdomTree Cloud Computing ETF a sell for now. This ETF's very brief history of less than four years has recently been characterized by underperformance and moments reflecting poor inflation-hedging strengths. This generates uncertainty and also provides insufficient evidence to back up any claim that WCLD will excel in the medium term. Therefore, I believe WisdomTree Cloud Computing ETF's outlook is somewhat grim relative to other ETFs that on record may offer more advantages and opportunities for profit during a struggling market or a recession.

However, as the cloud continues to make waves across a variety of sectors, WisdomTree Cloud Computing ETF could be due for an upgrade later on. This WCLD ETF is simply not a prime option now, but that doesn't mean it can't grow enough to become one in the future. In the meantime, I believe investors may be better off with funds like CLOU.

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