Artificial intelligence is transcending its status as a narrow tech-centric industry, significantly impacting sectors like energy markets, infrastructure spending, and portfolio construction. On a recent episode of CNBC's "ETF Edge," investing experts advise that investors focusing solely on chips and software could overlook the new avenues of value that AI is currently influencing.
Some of the market's innovative trends and rapid company growth are linked to AI's tangible needs like power, cooling, grid stability, and data center efficiency, which have become pressing constraints. For example, after years of underwhelming performance post-IPO in 2018, Bloom Energy, which supplies onsite fuel cells, has seen its stock surge by over 500% since last year due to high demand from data centers, propelling its market cap to over $30 billion.
This environment is breeding numerous opportunities in small- and mid-cap firms, traditionally outside the spotlight, which are now quickly moving up the investment hierarchy. According to Jennifer Grancio, TCW Group's global head of distribution, many of these firms operate in niche markets with limited competition, facilitating rapid improvement in their fundamentals well ahead of broader investor recognition.
Energy reliability stands at the core of these developments. As renewable energy sources have become economically competitive with fossil fuels, discussions have centered on their regularity. However, AI's ascendance has shifted this discussion, as it requires uninterrupted power supply to maintain data center operations and avert downtime.
This necessity has fostered a "huge shift towards nuclear" energy, Grancio noted, with renewed investments in existing plants and the innovation of small modular reactors. These advancements are encouraging new suppliers and fostering growth for niche players further up the utility and hyperscaler supply chain.
Nuclear Power ETFs
- First Trust Bloomberg Nuclear Power ETF (RCTR)
- VanEck Uranium and Nuclear ETF (NLR)
- Themes Uranium & Nuclear ETF (URAN)
- Range Nuclear Renaissance Index ETF (NUKZ)
- Global X Uranium ETF (URA)
Efficiency within data centers also plays a crucial role. With the expansion of AI workloads, cooling systems and power management have emerged as bottlenecks. Investors are gravitating towards companies that excel in their specific fields with few available alternatives, Grancio explained.
The market's structure, characterized by concentrated providers often bordering on oligopolies, creates operational leverage but also amplifies the potential costs of missteps.
This dynamic is boosting the appeal of actively managed ETFs. While passive indices broadly capture market returns and incorporate scaling companies, active strategies focus on identifying promising companies early and steering them through various growth phases.
However, there are considerable risks involved. Various sectors within the AI-driven ecosystems consist of "small, financially weak companies" reliant on electricity demand, according to VanEck CEO Jan van Eck. This dependency can lead to significant market volatility.
Van Eck emphasized the importance of diversifying one's portfolio instead of giving any single AI theme a disproportionate weight. "You don't want to overweight them in your portfolio," he cautioned.
He mentioned that Van Eck's nuclear ETF, after trading at high levels last year, has now reached a more accessible entry point for new investors.
The ETF experts additionally suggested that as investors integrate AI themes into their portfolios with more precision by 2026, active portfolio rebalancing and defined risk expectations will help them remain invested without resorting to market timing or emotional selling.