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Pay enough attention to the artificial intelligence (AI) trade long enough and an investor is bound to hear the term “bottleneck.” As in something that’s in short supply that AI desperately needs to continue its breakneck evolution.
Memory is one of just a few examples of AI bottlenecks and it’s one increasingly represented (and with some success) in the world of ETFs. Another prime example of an AI bottleneck is optical connectivity, also known as optics and photonics. It’s an investment theme that earnestly cobbled together momentum last year and it’s even breathed fresh life into companies such as Nokia (NOK) while ushering in focus on a batch of previously overlooked tech stocks. In simple terms, photonics players attempt to address the data transmission bottleneck.
“As AI infrastructure expands, traditional electrical interconnects based on copper cabling are facing growing physical limitations, including signal degradation, rising power consumption, and thermal management challenges. These constraints are emerging as major obstacles to further scaling of AI systems,” notes Third Bridge.
With an adequate number of investable photonics stocks on the market today, it will come as no surprise to advisors and experienced ETF investors that are already several related ETFs available, the latest of which joined the fold on July 15.
Lean on LUMA for Photonics Exposure
The KraneShares Photonic and Optical ETF (Ticker: LUMA) is the latest addition to the most unheralded photonics ETF camp. The new actively managed ETF is unique in that it has the flexibility to feature exposure to both public and private companies, but as things stand today, the lineup is largely dominated by US-listed stocks.
Some of those are familiar names, including Marvell Technology (MRVL), Nokia and Corning (GLW), among others. As things stand today, the photonics market isn’t as large as some other AI segments, such GPU or memory semiconductors, but the optical connectivity space is rapidly expanding. As Derek Yan, senior investment strategist at KraneShares, points out, “the total addressable market (TAM) for AI networking infrastructure is expected to reach over $150 billion by 2028; a 9x expansion from today.”
That gets into one of the primary perks associated with emerging technology ETFs such as LUMA: Removal of the stock-picking burden. Anyone diminishing that potential advantage should look at recent charts of two of social media’s recently beloved (and bashed) photonics stocks: Applied Optoelectronics (AAOI) and Sweden’s Sivers Semiconductor (SIVEF). The former is off 40.3% in just a month.
Translation: Picking the “right” photonics stocks isn’t a painstaking task, confirming that investors seeking exposure to this segment may do well to eschew the stock-picking and consider an ETF like LUMA.
Why LUMA Is Worth Keeping an Eye On
One of the most oft-mentioned critiques of thematic ETFs, of which LUMA is one, is that these products often debut around the times their underlying investment thesis is topping out. That may not be true of LUMA because photonics stocks, broadly speaking, were retreating well in advance of this ETF’s debut.
That doesn’t mean LUMA should be avoided by tactical risk-tolerant investors. The rookie ETF has the potential to be a convenient play on possible rebounds by photonics equities and there are credible fundamental reasons supporting such a scenario.
“Computing power has increased roughly 60,000 times over the past two decades, while the capacity to move data between chips and systems has increased only about 30 times,” according to KraneShares. “Moving data is becoming one of the biggest constraints on AI growth. Optical technology helps data centers connect more chips, process information faster, reduce energy use, and improve returns on AI infrastructure spending.”
Related: The Surprising Truth About AI and Financial Advisors: Clients Want Both