Cloud Computing ETF Outlook: AI Infrastructure Drives Divergence

The cloud computing sector is experiencing a significant divergence, with robust AI infrastructure spending contrasting with challenges in the broader Software as a Service (SaaS) market. This dynamic is impacting the performance of cloud computing ETFs, creating opportunities and risks for investors.

Stabilization in Large-Cap Cloud Infrastructure

The First Trust Cloud Computing ETF (SKYY), which focuses on large-cap infrastructure companies like Oracle (ORCL) and Microsoft (MSFT), has recently shown signs of stabilization. While its future trajectory – whether it will bounce, further decline, or enter a new bull market – remains uncertain, technical indicators suggest a potential bottoming process is underway, as evidenced by a recent shift in its 20-day moving average Barchart.com.

AI Spending Fuels Growth

Worldwide AI spending is projected to reach $2.5 trillion in 2026, representing a more than 40% increase year-over-year Barchart.com. Hyperscalers, including Amazon (AMZN), Google (GOOGL), and Microsoft (MSFT), are anticipated to invest over $600 billion in capital expenditures this year, nearly doubling their 2025 levels. This investment is primarily directed towards cloud infrastructure, AI-optimized servers, and GPU infrastructure. Companies like Oracle, heavily involved in this buildout, may have already established a bottom in late 2025.

Divergence Between Infrastructure and SaaS

While AI infrastructure spending surges, the SaaS market continues to grapple with valuation concerns. The more speculative segment of the cloud industry, represented by the WisdomTree Cloud Computing Fund (WCLD), is experiencing a downturn, with a year-to-date decline of over 20%. WCLD, concentrating on high-growth mid-cap software companies, has yet to demonstrate a clear bottoming process, facing challenges related to a high price-earnings ratio and limited immediate revenue from AI initiatives Barchart.com.

ETF Performance Comparison: SKYY vs. WCLD

The performance disparity between SKYY and WCLD highlights the differing dynamics within the cloud sector. SKYY’s portfolio includes prominent names like Microsoft, Oracle, and other “Magnificent Seven” companies, while WCLD focuses on smaller, high-growth software firms. This difference in composition contributes to the significant valuation gap between the two ETFs.

Risks and Uncertainties

The risk of disappointment is concentrated in the application layer of cloud computing. Despite rapid infrastructure development, many SaaS companies are struggling to monetize their offerings. Enterprises are currently experiencing a period of disillusionment with generative AI, leading to slower growth in new software subscriptions. Rising memory prices also pose a threat, potentially dampening demand for end devices and leading to a broader slowdown in IT spending. Persistently high 10-year Treasury yields could continue to pressure valuation multiples for high-growth cloud stocks.

Risk Assessment and Investor Sentiment

The ROAR Score for SKYY recently turned yellow (neutral risk), marking the first time since January 12th it wasn’t at a high-risk level. This shift reflects growing investor confidence, though uncertainties remain. The increasing caution among large investors suggests that a sustained rally in cloud computing ETFs may be contingent on resolving these uncertainties Barchart.com.

ETF Details (as of March 20, 2026)

• First Trust Cloud Computing ETF (SKYY): $111.44 (-1.93%), Net Assets: $2.41B, Expense Ratio: 0.60% Yahoo Finance
• First Trust Cloud Computing ETF (SKYY): Investment Objective: To track the ISE CTA Cloud Computing™ Index First Trust
• WisdomTree Cloud Computing Fund (WCLD): $27.96 (-1.72%)
• First Trust Dow Jones Internet Index Fund (FDN): $237.76 (-1.62%)
• First Trust NASDAQ Cybersecurity ETF (CIBR): $64.03 (-1.84%)
• Amplify Cybersecurity ETF (HACK): $76.49 (-2.42%)