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Cloud ETF Causes Stir With Netflix Pick

ByRoger Nusbaum, Contributor to TheStreet

NEW YORK (TheStreet) -- The launch of the First Trust ISE Cloud Computing Index Fund is the latest micro-niche fund to hit the market. Some will scoff at the find, some will trade it actively and some will find genuine investment merit. The fund is U.S.-based, will have 40 holdings, most of which are technology related; will rebalance quarterly; and will charge a 0.60% expense ratio. At the industry level the fund is dominated by software 32%, Internet services 22% and communications equipment 16%. One other industry in there that might be a surprise is Internet and catalog retail at 7.75%, with the largest name from that segment being Netflix . Netflix' inclusion means that not only does the fund provide logical access to companies building and servicing the cloud but also a couple of companies using the cloud. Netflix is the largest holding in the fund at 4.5% and it seems like everyone had an opinion about the name. The bulls believe that the growth is scalable because of how good the service is and bears make an argument for the stock to fall, pointing to valuations and increasing costs for content. CNBC tried to go after First Trust VP Ryan Issakainen Wednesday morning for Netflix' presence in the fund but missed the point. They anchors noted the stock is a consumer discretionary stock and Issakainen noted that the company relies on the cloud for most of its business. SKYY owning Netflix would be like the iShares North American Technology-Multimedia Networking Index Fund owning NYSE Euronext because it uses networking equipment to run its business. Does that seem like a logical type of holding? How you answer the question will go a long way to helping you decide whether to consider buying the fund. That only 7% is allocated to end users probably won't dilute the intended effect of the fund but the fate cloud industry will not hinder on the fortunes of Netflix. The other relatively large holdings in the fund include Right Now Technologies , Open Text and Rackspace Hosting and are more directly related to providing cloud services. First Trust provides an investor guide for cloud computing with various statistics and projections about growth and need for cloud computing including the fact that revenues for the industry were $15 billion in 2010 and projected to grow to $160 billion by 2020. Ten years can be a long time. Ten years ago there was tremendous hype surrounding the Internet in general as it was still fairly new. Arguably the reality of the Internet exceeded the hype but there has also been massive upheaval in terms of what companies comprise the investable universe. Anyone believing in the cloud and choosing SKYY as its proxy must, more so than with most other industries, keep tabs on what companies come and go as the space will look much different in 2020 and there can be no guarantee that SKYY will track those changes effectively. One last point: Despite the skepticism that some might have for a cloud computing ETF, the theme is legitimate and has plenty of investor interest. The existence of an ETF simply offers another choice and for some investors interested in the cloud it will be the best choice, most likely because it offers access without single-stock risk. All funds have drawbacks. For this one it might be the inclusion of Netflix. An investor interested in the cloud must weigh the pros and cons of any choice they might make and proceed with whatever way is best for them.

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