First Trust, the Wheaton-Ill.-based firm behind the First Trust Dow Jones Internet Index Fund (NYSEArca: FDN) and the First Trust Nasdaq CEA Smartphone Index Fund (Nasdaq: FONE) rolled out a cloud computing ETF this week, the First Trust ISE Cloud Computing Index Fund (NYSEArca: SKYY), hoping to keep providing investors new ways to access the IT revolution through an ETF wrapper.

Eric Anderson, First Trust’s ETF analyst and one of the portfolio managers for SKYY, visited with IU.com Managing Editor Olivier Ludwig to discuss how First Trust’s IT-related products differ and how SKYY should fit into an investment portfolio.

Ludwig: One of the main critiques of the FONE ETF is that it’s too “niche-y.” And the same could be said about SKYY. How do you respond to those views?

Anderson: Well, they’re not core allocations and not meant to be a replacement for a small-cap or large-cap core allocation. Our perspective is that we are going to bring these products as long as there’s demand for them. And we’ve gotten demand; we’ve raised about $120 million in our unit investment trusts [UITs] that are following cloud companies. There’s definitely an interest there. And FONE is really just meant to be part of a tactical or a satellite position in a portfolio.

Ludwig: One of the main differences between SKYY and FONE is that when you look at FONE closely, a lot of those names are quite familiar household names. With SKYY, that’s not the case. How is it that these names, many of which are second-tier companies, get paired together?

Anderson: The common theme is that they are involved in the cloud computing industry, either on the service side or the hardware side. They are companies with a minimum of $100 million market cap, so they are not micro-cap stocks by any stretch. They are all U.S. companies, but that doesn’t mean they are not going to be global in nature in years to come.

Ludwig: How do you explain some of the companies that are not very well known in SKYY? Does that have to do with the index, the methodology or what?

Anderson: The top 10 holdings are companies that have been in that pure-play bucket and they’ve done the best in the last month since the index last rebalanced. In that pure-play bucket, there is 3.4 percent weight allocated to companies like Juniper, etc., which happen to be the ones that have done the best. They might not be household names, but they are names that ISE has done research on and found to be heavily involved in the cloud computing industry. SKYY is basically 85 percent pure-play companies, 15 percent nonpure-play companies, and those 85 percent are equally weighted.

Keep in mind that they all have market cap greater than $100 million. We want to make sure we have a product that’s liquid, tradable, that we can easily rebalance; a product that market makers can hedge during the day so they can offer it very close to NAV throughout the day as well.

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