Artificial Intelligence (AI) has emerged as the dominant investment theme of 2024, marking a significant technological shift. Projections from IDC estimate that AI-related spending will surpass $631 billion by 2028, indicating a surge in investment interest and participation. Investors are increasingly utilizing Exchange Traded Funds (ETFs) to gain exposure to this expansive theme. Recently, Blackrock, the world’s largest asset manager, introduced two new ETFs: the iShares A.I. Innovation and Tech Active ETF (BAI) and the iShares Technology Opportunities Active ETF (TEK). This trend suggests a growing market for AI-related investment vehicles, although it is essential to recognize that not all ETFs targeting AI are equally beneficial or perform at the same level.
Among the surprising beneficiaries of the AI revolution are industries such as Data Center Real Estate Investment Trusts (REITs), which include prominent companies like Digital Realty Trust (DLR) and Equinix (EQIX). Additionally, the construction and infrastructure sectors supporting data centers are gaining traction, particularly through investment vehicles like ETF PAVE. The rise in AI applications underscores the increasing demand for electricity in the U.S., which has positively impacted utility companies. Moreover, the renaissance of nuclear power is reflected in the improved performance of uranium stocks, illustrated by the gains seen in the Global X Uranium ETF (URA).
As the market adapts to the AI trend, certain ETFs are emerging as particularly strong performers. Notably, recent charts from William O’Neil + Co. highlight the performance of leading AI-related ETFs, while others have not shared the same success. For instance, ETFs like the iShares Semiconductors (SOXX) and Global X Robotics and AI (BOTZ) have shown weaker performance, possibly related to their ties with fluctuating sectors such as smartphone and automotive demand. Broader market ETFs like Invesco’s Nasdaq 100 (QQQ) and Vanguard’s Mega Cap Growth (MGK) have not exclusively targeted AI but nonetheless hold significant positions in major AI spenders, including heavyweights like Microsoft, Meta, Amazon, and Google, which continue to drive advancements in the field.
Several critical use cases for AI span diverse sectors, focusing primarily on enhancing efficiency and generating cost savings. Key applications include automated machine learning, supply chain optimization, and self-driving technology, as well as significant investments in generative AI. As many companies attempt to harness AI’s capabilities, another crucial area of interest is the infrastructure Boom accompanying its growth, particularly focusing on data centers. The market for data centers is projected to expand significantly—rising from approximately $200 billion in 2022 to almost $450 billion by 2028. With electricity consumption from data centers expected to increase substantially, these facilities will account for a larger share of total energy demand, emphasizing the urgency for efficient energy solutions.
Industry leaders like Microsoft, Amazon, and Google are responsible for a significant fraction of data center capacity. They are aligning their strategies with developing clean energy initiatives to support their increasing electricity needs. For instance, Microsoft has entered a partnership with Constellation Energy to restart a nuclear facility and secure energy supply for the long term. Alphabet has similarly engaged with a nuclear startup, Kairos, to develop small modular reactors. These initiatives signal a robust commitment to ensuring that energy supply can keep pace with the forthcoming demand from the rapidly evolving tech landscape.
In summary, as AI continues to redefine the investment landscape, opportunities extend far beyond traditional semiconductor and software investments. Companies focused on constructing, operating, and powering data centers are poised to emerge as significant beneficiaries of these technological transformations. Investors are encouraged to delve deeper into these sectors, as they are likely to identify future market leaders with the potential to thrive over the next decade. The ongoing analysis of industry groups related to data centers reveals a promising outlook for this essential component of AI infrastructure, guiding strategic investments in a rapidly changing marketplace.