ETF Analysis: First Trust ISE Cloud Computing

The First Trust ISE Cloud Computing Index Fund (NASDAQ: SKYY) is an exchange-traded fund (ETF) designed to provide investors with specialized exposure to the cloud computing industry. Since the fund's inception on July 5, 2011, issued by First Trust, it has generated an annualized market price return of 11.07% as of July 31, 2015. Based on trailing three-year data, the fund has generated an annualized market price return of 19.91%.

SKYY seeks investment results, before fees and expenses, corresponding to the general price and yield of the ISE Cloud Computing Index. Component companies in the index and the fund engage in business activities supporting or utilizing the cloud computing space. The fund aims to provide these investment results by holding companies listed in the ISE Cloud Computing Index.

As of Aug. 7, 2015, the fund's top 10 holdings are 4.79% in Netflix, Inc., 4.45% in Amazon.com, Inc., 4.44% in Google, Inc. Class A, 4.23% in Facebook, Inc. Class A, 3.94% in Open Text Corporation, 3.93% in Equinix, Inc., 3.81% in F5 Networks, Inc., 3.75% in Juniper Networks, Inc., 3.73% in NetSuite, Inc. and 3.71% in Akamai Technologies, Inc.CharacteristicsThe First Trust ISE Cloud Computing Index Fund is legally structured as an open-ended investment company advised by First Trust Advisors L.P. The fund's investor servicing agent is the Bank of New York Mellon. SKYY is listed on the Nasdaq and can be traded on multiple platforms on the secondary market.

As of Aug. 7, 2015, SKYY has 36 holdings with net assets of $492.27 million. The fund rebalances its portfolio semi-annually and has a turnover ratio of 12% as of Sept. 30, 2014. SKYY has a competitive expensive expense ratio of 0.6%, while the average expense ratio of its category of technology is 0.57%.Suitability and RecommendationsDue to the nature of the fund, it carries a multitude of risks, such as cloud computing companies risk, information technology companies risk, Internet companies risk, equity risk, currency risk, depositary receipts risk, systematic risk and index correlation risk.

As of July 31, 2015, based on trailing three-year data, SKYY had an alpha (against the Morningstar Mid Growth Total Return USD Index, the fund's best-fit index) of -1.56, a beta (against the Morningstar Mid Growth Total Return USD) of 1.14, an R-squared value of 70.9 (against the Morningstar Mid Growth Total Return USD) a Sharpe ratio of 1.39, a Sortino ratio of 3 and an annualized return of 19.91%.

Based on modern portfolio theory (MPT), SKYY's alpha indicates it underperformed the Morningstar Mid Growth Total Return USD Index by an annualized 1.56%. The fund's beta indicates it is theoretically 14% more volatile than its best-fit index; this may signal that SKYY carries more risk due to its non-diversified portfolio. SKYY's R-squared value indicates that 70.95% of its past price fluctuations were explained by fluctuations in the Morningstar Mid Growth Total Return USD Index. SKYY's Sharpe ratio of 1.39 indicates it was able to provide adequate returns on a risk-adjusted basis. The fund's Sortino ratio indicates it generated marginally higher returns given its downside volatility, when compared to the average of the technology category's Sortino ratio of 2.8. These MPT statistics only represent past performance and are not indicative of SKYY's future statistics.

An investment in the First Trust ISE Cloud Computing Index Fund provides investors with specialized exposure to the cloud computing industry, which may not be suitable for investors seeking a fund with a diversified portfolio. Since the fund suffers from exiguous average daily share volume, it may not be suitable for active traders and speculators. SKYY has proven to provide above-average returns with an above-average risk level based on its statistics. It is suitable for long-term investors who are bullish on and seek exposure to the cloud computing industry while taking on a moderate risk level.