Should You Consider Investing in the Quantum Computing Sector? This Investment Adviser Has Some Suggestions

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Quantum computers (QC) work differently than regular (classical) computers. They operate on a quantum mechanical theory level and make calculations and simulations that could take computers and supercomputers thousands of years to solve.

Large companies such as Amazon and Google use quantum computing to handle large data and develop new technology systems. QCs are in the early stages of being cost-efficient, and their support systems are in the early stages of service and development.

Investors may be wondering if the sector has growth ahead of it. The MIT Management Sloan School thinks so, stating: "Quantum Computing, an innovation most can't define and still don't properly understand, might be the next obscure technology to have a seismic effect on business."

Investors should understand the space to see if they want to invest in or increase their exposure to it. The industry's potential numbers are big.

The Quantum Insider wrote that the QC market could increase the global economy by more than $1 trillion between 2025 and 2035. It also estimated that vendors should "capture $50 billion of revenue over this period."

According to Alex Challans, Quantum Insider CEO, QC will unlock value and activity across many trillion-dollar industries. He stated: "We expect this to drive material economic growth and job creation in regions which lean into supporting the technology."

Understanding the cloud and quantum computing

One potential investment opportunity for investors curious about QC is quantum cloud computing, which is expected to unlock potential in medicine, science, business and other parts of the economy.

It isn't cost-effective for small businesses to buy and service QCs, but quantum cloud computing allows them to remotely access and use QC power in the cloud — paying servicers to run algorithms and carry out simulations on cloud-based quantum processors using the servicer's platforms.

QC servicers including BlueQubit, IBM, Google, Microsoft and Amazon are developing innovations that could drastically improve this kind of computing and servicing.

How to invest in QC

Investors can pick out the stocks that they like by researching company data such as annual reports and income statements and gathering other information. Or they can choose a basket of stocks in wrappers such as ETFs or index funds.

There are many smaller companies in this sector, and smaller companies could have explosive growth. Investing through portfolios such as ETFs makes sense; portfolios of big and small companies could turn out to be a lower-risk way to get exposure.

Also, the index providers have done much of the necessary research in security selection.

The following is a list of ETFs that are invested in cloud and tech companies. The sector is often volatile, and fundamental analysis should be used to lower risk and increase appreciation potential.

WisdomTree Cloud Computing Fund

The WisdomTree Cloud Computing Fund (WCLD) tracks the BVP Nasdaq Emerging Cloud Index. It holds about 40% large-cap stocks, 50% mid-cap stocks and 10% small-cap stocks.

WisdomTree states that "for investors seeking to generate excess returns, this creates a challenging mix of slower-growing mature businesses with faster-growing emerging ones."

WisdomTree also states that cloud computing is already present in our everyday lives, changing how we share information digitally, and explains cloud computing in the following way: "The cloud refers to the aggregation of information online that can be accessed from anywhere, on any device."

Global X Cloud Computing ETF

The Global X Cloud Computing ETF (CLOU) "seeks to invest in companies positioned to benefit from the increased adoption of cloud computing technology, including companies whose principal business is in offering computing Software-as-a-Service (SaaS)."

Morningstar ranks the stocks held by CLOU as mid-cap. CLOU holds a Zacks 2 (Buy) ranking, based on factors such as asset class return, expense ratio and momentum. CLOU gives investors exposure to the Technology AI segment of the market.

ARK Next Generation Internet ETF

Ark Investment Management created and manages the ARK Next Generation Internet ETF (ARKW). Ark believes that innovation is a real life and business changer, and it is determined to invest in companies that are disruptors.

Ark states: "Companies within ARKW are focused on and expected to benefit from shifting the bases of technology infrastructure to the cloud, enabling mobile, new and local services, such as companies that rely on or benefit from the increased use of shared technology, infrastructure and services," along with other cloud and networking services.

First Trust Cloud Computing ETF

The First Trust Cloud Computing ETF (SKYY) states that cloud technology is one that "uses the internet and central remote servers to maintain data and applications, (and) this type of computing allows businesses and consumers to use applications without installation and provides access to personal files on any device with internet access."

First Trust states that corporations use cloud computing because it helps them run efficiently, service customers effectively and bring better numbers to corporate bottom lines.

SKYY attempts to invest in companies that deliver cloud-computing services — its infrastructure, its platforms and its applications. SKYY holds mid-cap stocks, according to Yahoo! Finance.

In its "Forecasting the Cloud" publications, First Trust printed the following facts and predictions:

• Public cloud services was forecast to account for nearly 46% of global cloud infrastructure spending by 2024, up from approximately 17% in 2014. Cloud IT infrastructure products include servers, enterprise storage and Ethernet switches.
• Global end-user spending on public cloud services was expected to exceed $724 billion in 2024, up from $491 billion in 2022.
• Total worldwide spending on cloud services, including hardware, software and professional/managed services, was estimated to rise from $706.6 billion in 2021 to $1.3 trillion by 2025. IDC is targeting a compound annual growth rate of 16.9% through 2025.

Opportunity in the cloud

Further growth for both the cloud and QC appears substantial, and this is without bringing AI into the equation. AI could exponentially increase these growth outlooks.

But the industry can be volatile, both in the stock market prices and in actual earnings and revenue reports. Investors should exercise caution when considering predicted future company earnings and stock price outlooks.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.