Understanding Cloud Computing Investment Opportunities
![](https://cdn.prod.website-files.com/66619e8203c4ee479e13658a/66a1420abe418bbd8aa26267_129_Cloud%20Computing%20(1).avif)
Key Takeaways
- Cloud computing is a key component of modern digital infrastructure and the growing AI supply chain
- Companies focused on cloud computing fall into two categories: pure plays with most of their revenue linked to the cloud, and large tech companies like Microsoft and Amazon, where cloud business is roughly a third or less of their revenues
- There are roughly a dozen ETFs with cloud computing revenue exposure in the range of 20% – 45% of assets, but how the assets are invested varies meaningfully from one ETF to another
- To fully understand what investors own, Syntax calculates cloud computing exposure at the company product line level and precise defines what types of businesses are included in cloud computing
The momentum surrounding AI that was unleashed in 2023 continues to grow, and one thing we have learned is that cloud infrastructure is a critical part of the growth in AI. According to Microsoft, cloud computing is:
“The delivery of computing services—including servers, storage, databases, networking, software, analytics, and intelligence—over the internet (“the cloud”) to offer faster innovation, flexible resources, and economies of scale.”
The benefits of cloud computing to companies include cost savings, on demand access to computing power, economies of scale, performance tied to a network of data centers with state-of-the-art hardware, security, and disaster recovery. The growth outlook for cloud computing is bright and is estimated at 16.5% per year through 2032.1 So how does an investor gain exposure to companies focused on this space? The answer is not as clear as you might think.
Companies involved in cloud computing can be broken into two categories. There are firms that have most of their revenue tied to cloud related services, which we refer to as “pure plays.” Equinix, Inc. (a cloud data center) and Arista Networks (cloud networking software) are examples of such pure plays, as they each have 100% of their revenue tied to cloud computing. The other category is large, technology-based firms with cloud related product line(s) that in total are less than 50% of revenue. For example, Cloud Computing services represent roughly 38% and 16% of revenue for Microsoft and Amazon, respectively.
The distinction between pure plays and the large, diversified tech players is important when evaluating the holdings of an ETF. When you look across the product lines of the S&P 500, cloud computing represents just under 5% of the total weight in the index.2 However, when the exposure is measured by a company’s primary business line, the weight in the index is less than 1%. This highlights much of the exposure to Cloud Computing is held as secondary and tertiary business lines of large companies, with relatively little weight allocated to pure play cloud computing companies.
This fact makes it difficult to construct a diversified cloud computing portfolio focusing on pure play companies alone. To illustrate this point, in Exhibit 1 we breakdown the companies in the Syntax 500 (US large cap) and Syntax 3000 (US total market) universes by the percentage of their revenue attributable to cloud computing.
Exhibit 1: Distribution of Cloud Computing Revenue % in the Syntax 500 and Syntax 3000 Universes
Number of companies as of March 31, 2024. Source: Syntax Data
The results show:
- In the Syntax 500, one third of the 30 companies with any exposure to cloud computing have 75% or more of their revenue tied to the cloud, while in the Syntax 3000 the number is about 40%.
- In both universes, about half have a majority of their revenue from cloud computing, implying the other half of revenue is not related to the cloud.
- Increasing the universe from the Syntax 500 to Syntax 3000 roughly doubles the number of companies with any cloud computing exposure.
A takeaway from this analysis is that there is a limited universe of pure play companies to choose from, and if you would like exposure to the various components of cloud computing, you will need to invest in both pure play and diversified large companies.
Analyzing The Cloud Computing ETF Market
To assess options available to investors, we screened the universe of approximately 2000 public equity ETFs to identify the 10 ETFs with the largest exposure to our Cloud Computing Lens as described in Exhibit 2.
Exhibit 2: Syntax Cloud Computing Lens Components
Source: Syntax Data
The results of our screen are shown in Exhibit 3.
Exhibit 3: ETFs With Meaningful Cloud Computing Exposure
Source: Ultumus, Syntax. Assets as of April 30, 2024
Highlights from the exhibit include:
- The ETFs shown have Cloud Computing exposure ranging from 18% to 42%.
- The First Trust ISE Cloud Computing Index Fund at $3 billion in assets is the largest ETF by a wide margin. The Global X Cloud Computing ETF and the Pacer Data and Infrastructure Real Estate ETF have meaningful assets at $472 million and $425 million, respectively.
- The ETFs have varied themes referenced in their names. Four ETFs have “Cloud Computing” or “Cloud” in their name; other wording includes “Digital Infrastructure,” “Data Center,” and “Big Data.”
To better assess what the focus of the cloud computing exposure is in each of these ETFs, we expanded our analysis in Exhibit 4 to show the six components that comprise our Cloud Computing Lens. This table is sorted by the Total Cloud Computing exposure from highest to lowest.
To better assess what the focus of the cloud computing exposure is in each of these ETFs, we expanded our analysis in Exhibit 4 to show the six components that comprise our Cloud Computing Lens. This table is sorted by the Total Cloud Computing exposure from highest to lowest.
Exhibit 4: Exposure To Cloud Computing Components
The ETFs have varying exposures to cloud computing in total and its components.
- The largest weight to cloud computing is 42%, reinforcing the fact there are limited pure play opportunities.
- Six of the ETFs have exposure to Data Centers, including the top four ETFs by concentration weight. Note that many of these companies are organized as REITs and are typically classified in the Real Estate sector.
- Exposure to Cloud Services and Cloud Hardware is found in most of the ETFs.
- The exposure to Software (Cloud and Database Software combined) is roughly 50% or more in five of the ten ETFs.
- Diversification levels vary within the ETFs: four ETFs are invested in five categories of the six components within the Cloud Computing Lens, three are invested in four categories.
Conclusions
The cloud computing investment landscape is a complicated and nuanced space. Based on Syntax’s product line classification data, we can cultivate a better understanding of the opportunities provided by cloud computing ETFs. We identified the top 10 ETFs with meaningful allocations to this space and showed:
- The ETFs analyzed covered a variety of named themes in their titles including “Cloud Computing,” “Digital Infrastructure,” “Big Data” and “Generative AI.”
- As many cloud computing companies are not pure plays, it is difficult to construct a diversified portfolio with a majority of its exposure to cloud computing. However, there are three ETFs with between 40% - 42% of their assets allocated across the broad cloud computing opportunity set.
- There are four ETFs with over $100 million in assets, with the largest having roughly $3 billion in assets.
We highlighted how the market is split between companies that can be considered pure plays and firms where cloud computing business lines are a minority of their revenue. EFT issuers may choose to invest in large tech companies like Microsoft and Amazon to gain exposure to the cloud services segment of the market, which makes sense. The challenge is, for example, cloud services represent just 16% of Amazon’s total revenue, which means the ETF also has exposure to the 84% of Amazon’s revenue tied to their e-commerce and other business lines. This is one of the reasons why the 10 ETFs we analyzed have total exposure to our Cloud Computing Lens in the range of roughly 20%-45%. The takeaway here is ETFs focused on the full range of cloud computing opportunities will be a combination of cloud computing and other technologies. We believe this underscores the need to move beyond the name of the ETF and focus on its holdings at the product line level.
Additionally, for investors that have significant exposure to the S&P 500, they need to be aware of whether they may be doubling up on the concentration risk in certain large tech companies.
Investors should realize as well that there is some subjectivity associated with defining an investment category or theme such as cloud computing based on the nuances above. Individuals and firms will have different perspectives, so it is difficult to say one view is better than another. What we do believe, however, is when investing in a theme, it should be clearly defined. It also reinforces the need to look beyond sectors: cloud computing is an amalgamation of different business lines that cut across sectors, hence the need to identify and quantity these exposures as done using our Cloud Computing Lens.
Syntax’s codifies company business models with the goal of enhancing investor transparency and decision making. The analysis in the paper was produced using our Affinity software and our proprietary FIS industry classification system. If you would like to learn more about our best-in-class tools for creating custom indices and analyzing public equity portfolios, please reach out to us for a demo at https://www.syntaxdata.com/.
1 Cloud Computing Market Size, Share, Value & Forecast [2032] (fortunebusinessinsights.com)
2 Syntax calculates exposure to a theme by identifying the percentage of revenue each company has associated with the specific theme, multiplying that percentage by the company’s weight in the portfolio, and then summing across all companies in the portfolio.
About Syntax
Syntax LLC is a financial data and technology company that codifies business models. Syntax operates through three segments: Company Data, Wealth Technology, and Financial Indices. Using its patented FIS® technology inspired by systems sciences, the Company Data segment offers the most comprehensive, granular, and accurate product line revenue data available on the market. The Wealth Technology segment then uses this abundance of data to facilitate the instantaneous creation and ongoing management of direct indexing solutions and rules-based equity portfolios through a fully automated platform. The Financial Indices segment enables Syntax to deliver customized and proprietary indices, including core global benchmarks and micro- and macro-thematic, smart beta, defined outcome, and target volatility indices. These indices are foundational for a range of financial products, such as ETFs, UITs, and structured products. Learn more at www.syntaxdata.com.
Important Disclaimers
This report is for informational purposes only and is not intended to be, nor should it be construed or used as an offer to sell, or a solicitation of any offer to buy, any security. Additionally, the information herein is not intended to provide, and should not be relied upon for, legal advice or investment recommendations. You should make an independent investigation of the matters described herein, including consulting your own advisors on the matters discussed herein. In addition, certain information contained in this presentation has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used in this presentation, such information has not been independently verified by Syntax and Syntax does not assume any responsibility for the accuracy or completeness of such information. Syntax LLC, its affiliates and their independent providers are not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Syntax® is a registered trademarks of Syntax, LLC.