ETF Prime: Mercer on AI Investing & Developments + CLOs

Geraci asked Mercer to weigh in on the AI-related discussions from tech giants such as Alphabet, Microsoft, Meta, and Tesla. Mercer observed that  more layoffs are happening in the tech industry as investment in artificial intelligence and related infrastructure continues to rise. In particular, Mercer noted that some companies like Tesla have announced rounds of layoffs. But “basically every single company” increased spending in AI-related divisions, such as cloud infrastructure and R&D.

“These companies are going all in. And the reason is, this is a gigantic business model shift. Their core businesses are at stake. The way people use technology is changing,” he added.

Sticking to the topic of quarterly earnings, Geraci asked Mercer what announcements and spending calls excited him in particular. Mercer was pleased to see Amazon announce increased investment toward data centers.

“They’re not just building this to have data centers. They’re building this for actual use cases that are in the future and may not even be designed yet,” he added. As for future use cases for data centers, Mercer points to physical automation technology that is enabled by AI.

With tech giants increasing investment in AI, Geraci noted he wasn’t surprised Nvidia’s market performance has been bolstered by AI investing. Mercer agreed, saying Nvidia’s success has “put a big target on their back.” Elaborating, Mercer observed that some of Nvidia’s customers are looking to build alternative chips while competing forces push innovation to drive investor attention. With the AI and semiconductor market nowhere near slowing down, Mercer predicted Nvidia will continue to see success in the near term.

“There’s no demand decrease in any near-term visibility by anyone’s market calculations. But who wins will certainly shift as customers come out with their own systems and competitors play out,” he said.

Moving on, Geraci asked Mercer to discuss key performance drivers behind a fund like th ROBO Global Artificial Intelligence ETF (THNQ B-). Noting that some competitors in the ETF space heavily weigh holdings within the top AI performers, Mercer assessed that many of the smaller-cap companies possess great growth potential. By only investing in the big players within the AI industry, “you’re not really holding these companies that may have a lot of upside and potential gains going forward,” he noted.

Geraci said his concerns over the top-heavy nature of market-cap-weighted indices. He asked Mercer if he believes investors should look down the cap spectrum when it comes to AI investing. Mercer stated he believes diversification makes sense. While the mega cap companies are important components of the AI industry, Mercer noted investing in smaller companies can offer less overlap and more portfolio diversification. That also have the potential for geographical diversity. Mercer added that geographical diversity “isn’t as prevalent” in the Q’s or the S&P.

Geraci was then joined by John Kim, CEO and CIO of Panagram. For investment options in the CLOs market, Kim highlighted both the Panagram BBB-B CLO ETF (CLOZ A) and the Panagram AAA CLO ETF (% etf CLOX %}.

He discussed how CLOZ is nearly evenly split between investing in bonds rated BBB and BB. That’s helping the fund provide high yields without “running a lot of undue risk.” Regarding CLOX, Kim noted the fund purely invests in  bonds rated AAA bonds. He added that the fund aims to provide 100% principal protection. Although he conceded such levels of safety can not guaranteed. However, Kim noted there has not been a default in AAA’s “in 30+ years of CLOs issuance.” He added that the fund can provide good yield and principal protection

VettaFi LLC (“VettaFi”) is the index provider for THNQ, for which it receives an index licensing fee. However, THNQ is not issued, sponsored, endorsed or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of THNQ.

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