Advisors and investors actively following the artificial intelligence (AI) revolution know that this disruptive technology, in a short amount of time, has been subject to a variety of bottlenecks, or points of congestion.
Those include computing power and the availability of related semiconductors as well as the dearth of available data centers and the availability of reliable power. The data center and power issues are being addressed, but there are long lead times on construction of data centers and even small nuclear facilities used to power AI. Those are just a few examples of AI bottlenecks. One of the others – one that has sent some stocks soaring (and tumbling) – is the booming need for dynamic random access memory (DRAM). In simple terms, that intersection with AI boils down to memory chips.
Leave it to the always inventive exchange traded funds (ETFs) to come up with a solution for investors. The aptly tickered Roundhill Memory ETF (DRAM) debuted on April 2 as the first ETF dedicated to memory chipmakers.
DRAM Offers Utility
This isn’t an endorsement of an ETF that has mere one trading day under its belt as of April 3, some important points are worth noting. First, the memory semiconductor space is largely dominated by just three players: Samsung, SK hynix and Micron Technology (NASDAQ: MU).
Second, old guard semiconductor ETFs, while credible AI plays in broad terms, don’t feature much exposure Micron and domestic equivalents and even less (or no) exposure to Samsung and SK hynix because those are South Korean companies. Investors that want big allocations to those companies via the ETF wrapper needed to buy a standard South Korea ETF prior to DRAM coming to market.
(Image Courtesy: Round Hill Investments)
“Broad semiconductor ETFs are a solid way to own ‘chips’ as a category, but they were not built to deliver meaningful exposure to memory names,” notes Roundhill. “Another approach investors use for access to memory companies is the iShares MSCI South Korea ETF (EWY), as Samsung and SK hynix make up almost half of the ETF’s weight. However, this method introduces a great deal of exposure to South Korean companies that are unrelated to the memory trade.”
Translation: Standard semiconductor and South Korea ETFs dilute the footprints of memory chipmakers. Conversely, the actively managed DRAM launched with a combined weight of nearly 72% to Micron, Samsung Electronics and SK hynix.
DRAM Concentrated But Relevant
Clearly, Roundhill’s DRAM isn’t the run-of-the-mill semiconductor ETF. Along those lines, advisors and investors should note that there simply isn’t a large universe of publicly traded memory chip stocks suitable for inclusion in this ETF.
As a result, the fund holds just nine stocks, or roughly a third of the roster sizes of traditional semiconductor ETFs. And as noted above, a third of the new ETF’s roster commands almost 72% of its weight so it is a concentrated fund. That doesn’t diminish its relevance to investors that like tactical satellite positions. Consider the following two points mentioned by Roundhill.
“First, companies are building a lot more AI capacity. More data centers are being upgraded for AI, and AI is expanding beyond building models into actually running them at scale for real applications,” says DRAM’s issuer. “Second, each new wave of AI requires more memory than the last. As models get bigger and workloads get heavier, the amount of memory needed inside an AI server goes up meaningfully.”
The new ETF charges 0.65% per year.
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