Portfolio Design

Advanced concepts in stock investment portfolio design.  Fundamentals, technical analysis and many other related topics are discussed.

When the Going Gets Tough, Select Niche Markets: Cloud Computing

An alternative to diversified holdings is to select niche markets that you are comfortable with. This strategy is especially attractive when stock market uncertainty leaves you with a low level of confidence in your investing prowess.

As an example, I realized about a month ago just how far along the cloud computing industry has come.  Almost all related companies "crushed it" at earnings time.  In my opinion, this industry is where Microsoft was in the late 1980s. I expect that sales from cloud computing companies will grow dramatically in the coming years.  Find a couple of niche markets like this and you will be off to the races, even if the stock market shows little promise.

Now there is just one catch.  There is no Cloud Computing sub-industry defined in Portfolio123's GICS database.  In order to develop a trading system based on this niche, you have to specify a custom stock universe. The rest of this post deals with how to do so.  If you are already an expert with Portfolio123 tools, you may want to skip to the end and avoid all the boring step-by-step detail.

Basically you will need to create a custom list of stock symbols that represent the cloud computing sub-industry.  You can do this the hard way by conducting your own research and compiling a list of public companies, or you can do it the smart way by finding an Exchange Traded Fund (ETF) that has already done the work for you.  ETF manufacturers are required by law to publish the holdings of their ETFs on a daily basis and you can easily take advantage of this.

BY using free ETF screeners out there on the web, such as ETFdb.com, you can easily find a suitable ETF.  For this example, I found the First Trust ISE Cloud Computing ETF (SKYY).  

First Trust Cloud Computing ETF (Symbol: SKYY) performance since launch

Screeners such as ETFdb.com provide a link to the ETF home page. Go to the ETF home page and select holdings. Note that every ETF manufacturer has its own user interface.  The details may be vary from what is shown here.

Go to the ETF home page and select holdings

Export the SKYY ETF holdings to Excel.

Export the SKYY ETF holdings to Excel

Block select the stock symbols (only) from within Excel then copy them to the clipboard.

Block select the ETF holdings from within Excel and copy to the clipboard

Sign in or go to Portfolio123 and select Custom Lists from the menu.

Sign in or go to Portfolio123 and select Custom Lists form the menu.

Create a new custom list and give it a relevant name such as CloudComputing.

Create a new custom list and give it a relevant name such as CloudComputing

Paste the clipboard into the field designated for the custom list symbols. Make sure that you take out the "." from class A and class B stock symbols as Portfolio123 won't recognize the ".". When you save the stock symbols the list should look similar to the screen shot shown below.

Paste the clipboard into the field designated for the custom list symbols.

Once the custom list has been created and saved then the next step is to call it up in a custom stock universe.  The example below shows the CloudComputing custom list called up and also specifies minimum trading liquidity requirements, and minimum stock price that I am willing to trade.

Create a custom universe by calling up the custom list, specifying your liquidity requirements, and minimum stock price.

Once you have created and saved the custom universe, you can call it up in simulations, portfolios, and screens.  Just remember that the result will have survivorship bias so be careful in how you optimize the system.  It is usually best to choose a standard ranking system offered by Portfolio123 or one of your own that you have confidence in. You also should check back with the ETF manufacturer to find out when the ETF is rebalanced.  Typically this will occur on a quarterly or annual basis.  Be sure to update the custom list after the ETF has been rebalanced with an updated selection of stocks.

If you have a niche industry that you would like to trade but don't have the time to create and maintain such a portfolio, then give me a shout.  If I like the idea then I will do the legwork and offer a Smart Alpha model at a reasonable price that you can subscribe to.  My Portfolio123 username is StockMarketStudent, or you can use the contact form on this site.

I currently have a Cloud Computing Smart Alpha model in the incubation phase.  It will be ready for subscribers in about two months.