Cloud Exposure: Looking Beyond the Benchmarks
Cloud stocks are rolling into benchmark indexes.
Last week, Nasdaq added DocuSign, the cloud-based electronic signature platform, to the Nasdaq 100 Index in place of United Airlines.1
United Airlines was dropped from the index because its market-cap weight fell below the required threshold to remain included. DocuSign was selected as a replacement because it was the largest eligible company not held in the index. As of this writing, DocuSign has returned 125% year-to-date while United Airlines has fallen 59%.
Swapping an airline for a cloud company seems like an inevitable corollary to the pandemic-induced lockdowns and transitions to remote work that we are experiencing. This was not the first cloud-based company added to, or first airline dropped from, the Nasdaq 100 Index this year.
Zoom Video Communications was added to the index in April in place of Willis Towers Watson, likely due to the latter’s pending acquisition by Aon.2 A week prior, American Airlines was replaced by medical device company DexCom.3
We have seen similar cloud company additions take place in the S&P 500 Index. ServiceNow and Paycom, which provide cloud-based technology and human resources solutions for enterprises, were both recently added to the benchmark index after former constituents were removed through acquisitions.4,5
Benchmarks Indexes Still Have <5% Pure-Play Cloud Exposure
Despite Software & Services being the largest industry group within both the Nasdaq 100 and S&P 500 indexes, both benchmarks provide limited exposure to the cloud computing industry.
These benchmarks indexes currently have less than 5% overlap with WCLD.
The Nasdaq 100 currently holds only five companies in common with WCLD (Workday, Adobe, Zoom, PayPal and, recently, DocuSign), which together only amount to approximately 4% of the index’s total weight. Dominant weights held in Apple, Microsoft, Alphabet and Facebook constitute about half of the index’s total weight. These mega-cap names are not held in WCLD because they do not meet WCLD’s selection criteria, which we detail below.
Approximately 3% of the S&P 500 Index’s weight is in five companies that are held in common with WCLD (Adobe, Paycom, ServiceNow, PayPal and Salesforce). The Information Technology and Growth versions of this index hold slightly larger weights of these companies, but their total exposures remain below 10%.
In our view, investors who want cloud exposure need to look beyond these broad equity, tech and growth indexes.
WCLD, through a collaboration with Nasdaq, leverages the expertise of Bessemer Venture Partners (BVP), a leading venture capital investor in the cloud computing industry, to provide exposure to pure-play cloud computing stocks with rapid growth characteristics.
WCLD seeks to track the price and yield performance, before fees and expenses, of the BVP Nasdaq Emerging Cloud Index (EMCLOUD). BVP, working with Nasdaq, constructed the index to only include:
- “pure-play” cloud companies deriving the majority of revenue from cloud computing
- companies with annual revenue growth of at least 15% in the last two years for new additions, or at least 7% in one of the last two years for current constituents
These selection criteria help identify current and emerging cloud leaders with the potential to disrupt their competitors as well as the future composition of benchmark indexes.
WCLD’s Unique and Targeted Cloud Exposure Has Significantly Outperformed in 2020
As of this writing, WCLD has returned 52.0% year-to-date and is a top performing fund in Morningstar’s U.S. Technology category—outperforming its peer average by 3,609 basis points (bps).6
Relative to its benchmarks, WCLD has outperformed by at least 3,455 bps year-to-date. By comparison, the S&P 500 is down 2.1%, the Nasdaq 100 Index up 17.5%, the S&P 500 Information Technology Index up 15.0% and the S&P 500 Growth Index up 8.9%.7
Given the significant weight the Nasdaq 100 and S&P 500 indexes hold in the Software & Services industry group, investors may be unaware of their limited cloud industry exposure. WCLD may be a fitting solution for adding unique cloud exposure to fill the gap.
Unless otherwise stated, data source is FactSet, as of June 23, 2020.
As of June 23, 2020, WCLD held 2.7% of its weight in DocuSign, 3.6% of its weight in Zoom, 1.7% of its weight in ServiceNow, 0% of its weight in DexCom and 1.6% of its weight in Paycom.
1"DocuSign, Inc. to Join the NASDAQ-100 Index Beginning June 22, 2020," Nasdaq, 6/12/20.
2"Zoom Video Communications, Inc. to Join the NASDAQ-100 Index Beginning April 30, 2020," Nasdaq, 4/23/20.
3"DexCom, Inc. to Join the NASDAQ-100 Index Beginning April 20, 2020" Nasdaq, 4/10/20.
4"Thermo Fisher Scientific Set to Join S&P 100; ServiceNow to Join S&P 500," S&P Global, 11/19/19.
5"Paycom Software Set to Join S&P 500S&P Global,” 1/22/20.
6Source: Morningstar, for the period 12/31/19–6/23/20. The U.S. Technology category includes 234 funds.
7Sources: WisdomTree, Bloomberg, for the period 12/31/19–6/23/20.
Important Risks Related to this Article
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Jeremy Schwartz has served as our Global Chief Investment Officer since November 2021 and leads WisdomTree’s investment strategy team in the construction of WisdomTree’s equity Indexes, quantitative active strategies and multi-asset Model Portfolios. Jeremy joined WisdomTree in May 2005 as a Senior Analyst, adding Deputy Director of Research to his responsibilities in February 2007. He served as Director of Research from October 2008 to October 2018 and as Global Head of Research from November 2018 to November 2021. Before joining WisdomTree, he was a head research assistant for Professor Jeremy Siegel and, in 2022, became his co-author on the sixth edition of the book Stocks for the Long Run. Jeremy is also co-author of the Financial Analysts Journal paper “What Happened to the Original Stocks in the S&P 500?” He received his B.S. in economics from The Wharton School of the University of Pennsylvania and hosts the Wharton Business Radio program Behind the Markets on SiriusXM 132. Jeremy is a member of the CFA Society of Philadelphia.