Why ETF Shares is launching a fund to capture the "other half" of the AI story

The biggest names across the sector experienced a broad slide, with SKS Technologies, Southern Cross Electrical Engineering, GenusPlus and NRW Holdings among the worst hit.

It’s also not just domestic players that are taking a hit, with a raft of chipmakers and AI-exposed companies getting rocked by global inflation and interest rate concerns.

Looking at all of this, it might sound like a bad time to launch a data centre ETF. However, ETF Shares Chief Operating Officer and Portfolio Manager William Taylor doesn’t seem concerned, which is likely because the underlying story hasn’t changed.

The upcoming ETFS AI Infrastructure and Data Centre ETF (ASX: DTCR) launch, according to Taylor, aims to provide investors with exposure to “the other half” of the AI story that is harder to access than companies like Nvidia, ASML and TSMC, which are commonplace in global ETFs.

In this Q&A, Taylor unpacks their new ETF offering, the reason Aussie investors are flocking to copper but lithium is struggling, and why they removed Walmart from an ETF it probably shouldn’t have been in to start with.

You’re launching a new ETF in a few weeks, what is it, and what gap in the market are you trying to fill?

We’re launching the ETFS AI Infrastructure and Data Centre ETF (ASX: DTCR).

A lot has been said about the huge capex spend on data centres, but roughly half of it never goes near a chip. It goes into everything that makes the chips usable: power cables, switchgear, networking gear, generators, cooling systems and server racks.

Most Australians already own the chip side through companies such as Nvidia, ASML and TSMC, which sit in most global ETFs. 

But very few own the other half: companies like Hon Hai (Foxconn), which assembles Nvidia’s AI servers, Celestica and Iron Mountain. DTCR is built to give investors exposure to that other half.

That’s also why the recent volatility doesn’t concern us. DTCR invests in the physical side of the AI roll out rather than the neoclouds, which we don't touch, so the companies that have really struggled aren’t in the ETF, and the screens we’ve introduced mean they wouldn’t be included. It’s the picks and shovels part of the trade which the ETF provides exposure to.

Which ETF in your suite has seen the strongest flows recently and what does that tell you about what Australian investors are looking for right now?

Copper. Australians are mining savvy, and they’ve worked out two things: copper supply is heading for a crunch, and the ASX has surprisingly few ways to play it.

BHP, Rio and now Glencore mine a lot of copper, but they also mine iron ore, coal and plenty else, which dilutes the copper exposure. Most of the pure-play copper miners are listed in Canada. Our ETFS Global Pure Play Copper Mining ETF (ASX: CPPR) brings them onto the ASX in a single trade.

ETF portfolio construction often involves regular rebalancing. What is the most recent position you've trimmed or exited, and why did it stand out as the right call at the time?

We removed Walmart from our ETFS Magnificent 7+ ETF (ASX: HUGE).

Honestly, it never really belonged. Nobody hears “Mag 7” and thinks of a supermarket.

It got in on a technicality: Walmart moved its listing from the NYSE to the Nasdaq, and HUGE holds the largest Nasdaq listed companies. Advanced Micro Devices (NASDAQ: AMD) took its place, which is a much better fit for the theme.

What's the most interesting chart or data point you've seen this week — something that genuinely changed or reinforced how you're thinking about markets?

Deutsche Bank’s chart above shows China and the US gobbling up the world’s copper. Their view is that Chinese state stockpiling has been underreported. If they’re right, copper goes to US$22,000 a tonne, about 55% above today’s price.

What I find interesting is that this is where these two investment themes meet. Every AI data centre is wired with copper. The chips get the headlines, but the infrastructure, including the metals, is doing a lot of the work.

What was your weekly high — a market development, a fund flow signal or a conversation that stood out as a genuine positive?

More people know who we are.

As anyone who’s worked at a startup will tell you, the hardest part of a new business is building a brand. Even if people know the team, they still need to get comfortable with the company, and funds management runs on trust.

This week we had more calls where we didn’t need to introduce ourselves. It’s a small win, but it tells you the message is getting through.

What was your weekly low — what disappointed or surprised you this week, and what did you take from it?

Lithium. Prices have kept sliding, which has made our ETFS Global Lithium Miners ETF (VOLT) one of the ASX’s biggest ETF dogs over the past six months. This week was particularly rough.

The lesson is an old one: commodity cycles are brutal in both directions. Low prices are what force miners to cut supply, and that is usually how the next upswing starts.

What originally drew you to the ETF sector and what continues to keep you inspired today?

I’ve always worked in funds management and have seen first-hand the evolution of investors moving from managed funds to ETFs. ETFs are a great way to access different investment strategies, whether it’s a core index exposure or something a bit funkier, like copper miners.

What inspires me is that I’m now in a position to directly influence how people invest: developing new ideas, bringing ETFs to market and then managing the funds on behalf of investors.

The ETF market has gone from $65 billion to $360 billion in Australia in five years. A lot of new investors have come in without much context. What's the one thing you wish they all understood before they bought their first ETF?

Market making. It’s the biggest source of confusion and where we field the most questions.

People treat ETFs like shares or LICs and check the on screen volume. But an ETF’s liquidity isn’t its on screen volume; it’s the liquidity of what it holds. Professional market makers like Jane Street, Susquehanna and Nine Mile are contracted to quote buy and sell prices throughout the day, and they create or redeem units with the issuer to meet demand.

So you can trade a “zero volume” ETF without moving the price, something you can’t do with a thinly traded share or LIC.

How do you unwind when you’re not thinking about the market?

I’ve recently become a dad for the first time, so when I’m not thinking about markets, I’m trying to make my eight-week-old daughter smile.

Rapid fire! 🔥

What is your favourite investing book?

Poor Charlie’s Almanack by Charlie Munger.

What is your favourite investing or finance/markets-related podcast?

NAB’s Morning Call with Phil Dobbie. Cliché, I know.

What’s the first thing you read each morning?

Bloomberg, the AFR and the FT for the headlines, then Livewire to see what fund managers are thinking.

What is your favourite restaurant?

Sushi. Kabuki in the city was my go-to until it closed, so I’m in the market for a new spot.

What’s something people are surprised to learn about you?

I played rugby to a good standard and left home at 16 on a rugby scholarship. These days, the most strenuous thing I do is a quick nine holes of golf.

Think there’s a better pick? Prove it. Share your rapid-fire book, podcast, and daily read in the comments.

ETF

ETFS Magnificent 7+ ETF (HUGE)

Global Shares

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