Michael Johnston: UBS continued an aggressive expansion of its lineup of exchange-traded notes this week, debuting a product offering leveraged exposure to a hot corner of the technology sector. The launch of the ETRACS Monthly 2x Leveraged ISE Cloud Computing TR Index ETN (NYSE:LSKY) comes exactly three months after First Trust debuted an ETF linked to the same index; (NASDAQ:SKYY) began trading in early July. The new UBS ETN will seek to deliver monthly results that correspond to 200% of the change in the ISE Cloud Computing Index, a benchmark that consists of about 40 stocks.
Cloud Computing 101
Cloud computing is a relatively new technology that is expected to grow quickly in coming years. Generally, cloud computing refers to the concept of sharing resources and software over the Internet. Basically, it allows end users to access data and storage services without being physically connected to the system that is delivering the services.
Cloud computing is seen as an opportunity for businesses and individuals to both reduce technology expenses and enhance security of sensitive data.
Under The Hood Of LSKY
Most investors agree that the future for the cloud computing space is extremely bright. But the challenge is coming up with a way to efficiently tap into this investment thesis; there are very few pure play cloud computing firms who are publicly-traded. Moreover, many of the big players in the space have significant operations in other lines of business, including online retailing, search engines, and even consumer products. A look at the major components of LSKY’s index highlights this challenge; Google, Amazon.com, and Apple are all found in this product.
The underlying index can be split into three major groups:
- Pure Play Cloud Computing Companies
- Non Pure Play Cloud Computing Companies
- Technology Conglomerate Cloud Computing Companies
In constructing the index, 10% of the total is assigned to technology conglomerate companies, with the remainder split between pure play and non pure play firms. Within each of the classifications, component stocks are equal weighted.
The new ETN will seek to achieve its effective leverage on a monthly basis, meaning that the reset of exposure comes only a few times per year, as opposed to after every trading day [see Three Kinds Of Leveraged ETFs].
Since its inception in July, First Trust’s Cloud Computing Index Fund (NASDAQ:SKYY) has gathered about $50 million in assets–an impressive total considering the hyper-targeted nature of the product. Through Tuesday trading, SKYY had lost a little more than 21% of its value since inception. During that same stretch, the broad-based Technology SPDR (NYSE:XLK) has lost only about 10%.
Written By Michael Johnston From ETF Database Disclosure: No positions at time of writing.
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