As the boom of artificial intelligence (AI) fuels the demand for cloud solutions and cybersecurity, DBS Group Research analysts have named four ETFs picks to ride out this trend.
They are First Trust Cloud Computing (SKYY US) and Global X Cloud Computing ETF (CLOU US) in the cloud space, and iShares Cybersecurity and Tech ETF (IHAK) and Global X Cybersecurity ETF (BUG) in the cybersecurity space.
Analysts Ling Lee Keng and Amanda Tan say that the US is the key region for all their picks in terms of geographical exposure.
Building and training AI models is technically complex and requires significant investment, which can be a major barrier for many businesses, but the cloud has democratised AI by making it more accessible and cost-effective particularly for smaller organisations, says DBS.
The analysts note that according to Gartner, the public cloud services market will reach US$1.26 trillion in value with a 20% CAGR between 2023-2028. Infrastructure-as-a-Service (IaaS) will have the highest CAGR of 25%, followed by Platform-as-a-service (PaaS) at 20% and Software-as-a-Service (SaaS) at 18%.
They note that the information security end-user spending is expected to see a CAGR of 13% between 2023-2028 and reach US$292 billion by 2024, and one area of particular concern is the cloud, which could become a significant battleground for cyber threats.
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Beyond the “AI crown jewel” Nvidia Corp, DBS sees other beneficiaries such as hyperscalers in the likes of Amazon, Microsoft and Google which provide AI support infrastructure and platforms to deploy applications.
Companies like Salesforce and Oracle are also benefiting by offering cloud-hosted software for customer relationship management (CRM) and enterprise resource planning (ERP), they say.
Ling and Tan says that SKKY is one of the biggest ETFs with exposure to cloud, with an AUM of US$3.45 billion. In terms of liquidity, it is also among the highest, with an average daily volume of 127,400.
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Benchmarked to the ISE Cloud Computing Index, its top holdings include hyperscalers such as Oracle, Amazon, Alphabet, and Microsoft, and other companies like Lumen Technologies and IBM.
They note that in terms of sector allocation, 60.8% of its more than 60 companies are from the software segment, 15.1% from the computer segment, and 12.0% from the internet division.
SKY’s total one-year return is 47.3%, and the fund has a 14.3% annualised return since inception.
CLOU on the other hand seeks to invest in companies positioned to benefit from the increased adoption of cloud computing.
Besides companies in SaaS, PaaS and IaaS, CLOU’s holdings exposure extends to other cloud-related segments like managed server storage space and data centre REITs and or cloud and edge computing infrastructure and hardware, they say.
The analysts note that CLOU currently has 37 holdings, with top holdings including Shopify, Qualys, and HubSpot. In terms of industry breakdown, software accounts for 72.9%%, internet 14.3%, and computers 8.9%.
It’s total one-year return stands at 14.3%, and its annualised returns since inception is 8.1%.
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For cybersecurity, IHAK tracks the developed and emerging market companies involved in cyber security and technology, including cybersecurity hardware, software, products, and services.
Out of the current 33 holdings, computers account for 51.4%, software 15.4%, internet 14.5%, and telecommunications 11.7%. Top holdings include SentinelOne, Fortinet, and CyberArk Software.
IHAK’s total one-year return stands at 22.2%, and its annualised performance since inception stands at 13.2%.
Finally, BUG primarily comprises companies poised to benefit from the increased adoption of cybersecurity technology, such as the development and management of security protocols preventing intrusion and attacks to systems.
The computer division is among the top sectors and accounts for 54.0%, followed by internet at 28.7%, software at 12.1%, and telecommunications at 4.7%. Out of the 21 companies in its portfolio, top holdings include Fortinet, CrowdStrike Holdings, and Zscaler, note Ling and Tan.
BUG’s total one-year return stands at 27.9% and annualised performance since inception stands at 16.3%.
