Few ETFs have performed worse over the last month than the one I selected for the 2020 Best ETFs contest, the Global X Cloud Computing Fund (NASDAQ:CLOU).
The shares peaked Sept. 1 at nearly $26 but are trading Sept. 22 closer to $23.
That’s to be expected. Fashions change on a dime. When a sector is no longer fashionable it falls fast. CLOU fell because the clouds were seen to be overvalued, thus the applications they host were seen to be overvalued.
CLOU is loaded with high flyers like Twilio (NYSE:TWLO), Zoom Video (NASDAQ:ZM), Zscaler (NASDAQ:ZS), Coupa Software (NASDAQ:COUP), and Shopify (NYSE:SHOP). But if you’re going to make gains, you’re going to take risks. Fashion is one of those risks.
CLOU represents the great technology investment theme of our time.
Hardware is becoming software.
It’s not the servers, networking or real estate inside a cloud data center that makes it valuable. It’s the software running on it. Each of the five cloud czars, as I call them, has a valuable software monopoly delivering cash flow to pay for its infrastructure. Applications get to ride on that infrastructure for a fraction of its cost, like stores renting real estate.
But the more the tenants grow, the less rent they pay relative to their size.
What’s in CLOU?
If I were putting my own money to work here, I would have taken some profits recently. Nothing goes straight to the sky, even cloud stocks.
But since the start of the year, even with March’s pandemic collapse and the recent cloud sun showers, this ETF is up nearly 50%. CLOU leavens its holdings in stocks like Zoom with smaller holdings in such stocks as Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alibaba (NASDAQ:BABA), as well as slow-moving real estate investment trusts (REITs) such as Cyrus One (NASDAQ:CONE) and Digital Realty Trust (NYSE:DLR).
The ETF is not designed for traders, but for investors following the length and breadth of the cloud application trend.
Cloud applications aren’t the only stocks winning in 2020. The cloud czars themselves, the semiconductors, and health care stocks have all delivered solid gains. A growth portfolio will want exposure to all of them.
A year ago, I wrote about three great investment themes for this decade.
These themes remain intact. Oil is indeed falling. The fires and storms of 2020 guarantee that fall will continue. The companies in CLOU, and those that might be added, are in good position to build the Machine Internet. Anything whose condition can be sensed, calculated, and adjusted will become a networked computer over the next decade. More internet demand will come from machines than from people using them.
The third trend, DNA as a programming language, is now starting to emerge. Nearly all the hottest stocks with valuations under $2 billion today are in biotech. They’re as risky as computer hardware was 40 years ago, before the IBM (NYSE:IBM) personal computer was launched. But they’re on deck.
The Bottom Line
My plan for the 2021 edition of this contest is to look for a good biotech ETF.
It’s not that CLOU will fall. It’s just going to become less speculative, more of an investment. The cream in this field will rise to the top. Leadership will be established, growth rates will slow, and valuations will be based on sales and profits rather than growth and hope.
The new users of the cloud will be drug companies, medical companies, and collectors of medical data. The attention of the cloud will switch from people to machines, and the next investing craze will commence.
On the date of publication, Dana Blankenhorn owned shares in MSFT, AMZN and BABA.
Dana Blankenhorn has been a financial and technology journalist since 1978. 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.