To win a contest you must be bold. So my entry in InvestorPlace.com’s Best ETFs for 2020 contest is the Global X Cloud Computing ETF (NASDAQ:CLOU).
The reason is simple. Despite having been around for over a decade, most companies have only completed roughly 20% of their transitions to the cloud. The cloud is a long-term trend. It might be more precise to call cloud the long-term trend.
There are good reasons for this.
Clouds save money, because they’re naturally efficient. Clouds can scale quickly, because they’re self-service. You can budget a cloud, subscribing to services rather than building anything yourself. Anything you could once do on a desktop or in a data center, you can do in a cloud.
Meet the CLOU ETF
CLOU is a new exchange-traded fund, launched in April by Global X, an ETF specialist. According to Global X, it tracks the Indxx Global Cloud Computing Index, which as its name suggests, is an index of cloud computing stocks. The ETF comes with a total expense ratio of 0.68%, or $68 on a $10,000 investment.
The ETF buys stocks in five types of companies:
- Companies that license and deliver software as a service
- Companies that provide a platform for creating such applications, called “platform as a service”
- Those that provide cloud infrastructure as a service
- Companies that own or manage cloud hardware, like data center-focused real estate investment trusts, and
- Companies that make or distribute hardware or software used in cloud computing.
As of Dec. 11, CLOU had stock in 38 different companies. The largest holding, although it makes up less than 5% of the total, is Paycom Software (NYSE:PAYC), which offers payroll and human resources software from the cloud. The smallest holding, making up 0.3% of the total, is Kingsoft, a Chinese producer of games software.
Risks to CLOU
I avoid ETFs for my own account. I prefer to either place my own bets on specific stocks or buy broad-based mutual funds that track the whole market.
But my children, who are just getting started in investing, say “OK boomer” to that. They like ETFs a lot. ETFs provide diversification without a lot of investment. They let you focus on specific industries rather than taking on the risks of the broader market.
There are risks in CLOU. There are some stocks in this group I wouldn’t buy on a bet, like Shopify (NYSE:SHOP). I’ve made Shopify a favorite punching bag over the last two years, but it keeps rising anyway. There are also a host of companies in here I love, like Netflix (NASDAQ:NFLX), Amazon (NASDAQ:AMZN), Alibaba (NYSE:BABA) and Salesforce (NYSE:CRM).
An ETF manager doesn’t focus on any single holding. The idea is to track the group — to track the relevant industry. Thus, I’m less worried about what may be an ETF portfolio’s dogs than I might otherwise.
If the economy turns sour, I could be out of the money on CLOU. But history says technology stocks are the first group to come back after a downturn. That’s because when survival is on the line it’s companies that can cut costs that survive, and clouds cut costs.
The Bottom Line on the Best ETFs for 2020
My own outlook for the economy in 2020 is bearish. That’s because too many people are bullish. It’s when everyone is in the market that it falls.
There are huge macroeconomic risks in the outlook. There’s too much money chasing too few assets. Hard assets like oil and real estate aren’t working. Politicians are at the policy wheel and that’s never good.
But if the economic ship doesn’t crash, CLOU will be a good place to be. Even if it does, CLOU will be a good place to be when it’s time to pick up the pieces.
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and AMZN.