AI and Power ETFs Face Turbulence Amid Tech Debt Concerns
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The burgeoning field of artificial intelligence demands immense energy, driving investor interest in AI power ETFs. However, recent market volatility, fueled by concerns over tech company debt and potential oversupply, has cast a shadow over these investments. The largest ETF in the space, the KODEX US AI Power Core Infrastructure, has experienced a significant downturn, mirroring anxieties about the sustainability of the AI boom.
The Rise and Fall of AI Power ETFs
Initially, the convergence of artificial intelligence (AI) and the power sector appeared a natural investment theme. Data centers, the engines of AI, require substantial and reliable power sources. This led to the creation of ETFs designed to capitalize on this synergy, bundling companies involved in AI infrastructure and power generation. The KODEX US AI Power Core Infrastructure ETF, boasting a substantial market capitalization, quickly gained traction, fueled by the success of companies like GE Vernova, which saw its stock price soar over 400% in the past five years.
However, the tide has turned. The ETF plunged nearly 10% on November 21st, and experienced a 15.8% decline over the past month (October 21st to November 21st)—a steeper drop than the S&P 500’s 2.9% decrease over the same period. This downturn is attributed to the “recent AI bubble loan and the decline in the possibility of an interest rate cut,” according to market analysts.
Tech Giants Take on Debt, Raising Concerns
Wall Street is increasingly worried about the financial sustainability of AI investments. Big tech companies, despite their substantial revenue, are increasingly relying on debt to fund their AI ambitions. Oracle raised $18 billion through bonds last September, followed by Meta’s $30 billion issuance last month. Even Google and Amazon, traditionally more cautious with debt, have recently entered the corporate bond market, raising $25 billion and $15 billion respectively.
“This is interpreted to mean that AI business costs so much money that even the rich can struggle,” one analyst noted. This surge in borrowing has sparked fears of deteriorating financial conditions, potentially leading to overcapacity in power infrastructure and ultimately, slowing profitability for power companies. The concern is that massive investments in new power plants, transmission networks, and transformers could result in an oversupply, diminishing returns for investors.
Inside the KODEX US AI Power Core Infrastructure ETF
The KODEX US AI Power Core Infrastructure ETF’s portfolio reveals its concentrated bet on AI-driven power demand. As of November 21st, GE Vernova (17.7%) held the largest weighting, followed by Celestica (12.2%), an electronics manufacturer specializing in hardware for data centers, Quanta Services (11.8%), a power infrastructure construction firm, Vertiv Holdings (11.7%), a provider of power and cooling infrastructure for data centers, Constellation Energy (11.5%), and Vistra Energy (11.5%). These six companies collectively represent 70.4% of the ETF, highlighting its “crazy investment” in a limited number of AI power infrastructure companies and increasing its inherent volatility. Despite the recent correction, the ETF still boasts a 30.4% year-to-date increase.
A Tale of Two ETFs: US vs. Korea
While the U.S.-focused ETF struggles, Korean AI power ETFs are exhibiting resilience. The KODEX AI Power Core Facility ETF, which concentrates on domestic power companies, has risen 14.8% in the past month, moving in the opposite direction of its U.S. counterpart. This divergence stems from the differing performance of the underlying companies.
The U.S. ETF is heavily reliant on the future performance of American infrastructure companies, while the KODEX AI Power Core Facility ETF focuses on the “Big 3” domestic power facilities: Hyosung Heavy Industries (28.1%), LS Electric (20.7%), and HD Hyundai Electric (20.2%). These Korean companies have already demonstrated strong performance, with a cumulative balance of approximately 29.3916 trillion won as of the end of last year—a 43.5% increase year-over-year. They are actively expanding capacity to meet the anticipated demand through 2030, securing orders for ultra-high voltage transformers specifically for AI applications.
Dividend Yields Remain Low
Despite the growth potential, both ETFs offer unattractive dividend yields. The U.S. AI Power Core Infrastructure ETF yields just 0.39%, below domestic bank deposit rates, while the AI Power Core Facilities ETF offers a slightly higher 0.53%. Both ETFs are primarily comprised of growth stocks, making them less appealing to income-focused investors.
An ETF industry official advised, “For long-term investment, it is necessary to restructure the portfolio by adding industries other than AI or dividend growth stocks,” as investments shift towards the financial and consumer goods sectors.
Ultimately, the future of AI power ETFs hinges on the continued investment in AI and the ability of power infrastructure companies to deliver sustainable profitability. While the potential remains significant, investors must carefully weigh the risks and consider a diversified approach.
