Alphabet's Higher AI Spending Could Boost These ETFs

Alphabet's decision to raise its capital expenditure outlook highlights the enormous amount of investment required to expand AI capabilities. The spending is expected to support data centers, networking infrastructure, advanced computing systems and other AI-related technologies.

The company's aggressive investment in data centers and AI infrastructure has already placed pressure on its cash flow. Amid this, Alphabet is preparing to raise as much as $25 billion through a U.S. investment-grade bond offering.

The company reportedly posted a negative free cash flow of $5.86 billion in the second quarter, which was its first quarterly cash-flow deficit since its 2004 initial public offering (IPO), according to bloomingbit.

AI Data Center Spending Boosts Chip Demand

Higher spending on data centers typically translates to greater demand for GPUs, memory chips, networking equipment and custom AI accelerators.

NVIDIA NVDA remains a leading supplier of graphics processing units (GPUs) used for AI training and inference.

Alphabet uses NVIDIA’s chips both for its own computing needs and to provide AI computing capacity to customers through Google Cloud.

Broadcom AVGO also has an important relationship with Alphabet. The companies have worked together on custom AI accelerators, allowing Alphabet to develop specialized computing solutions alongside its continued use of NVIDIA GPUs.

Memory chips are a critical component of AI infrastructure. AI data centers require large amounts of high-bandwidth memory and other advanced memory products, making Micron Technology MUan important beneficiary of the AI investment cycle.

AI Spending Fuels Tech & Semiconductor ETFs

Alphabet's decision to raise its capital expenditure guidance reinforces the view that AI infrastructure investment remains a major corporate priority. For ETF investors, the opportunity extends beyond Alphabet.

As a result, investors looking for diversified exposure to the AI spending cycle may want to watch both mega-cap technology ETFs and semiconductor ETFs. However, elevated valuations, cyclical semiconductor demand and the enormous cost of AI infrastructure remain key risks.

ETFs With High Alphabet Weightage

Global X PureCap MSCI Communication Services ETF GXPC gives investors exposure to U.S. Communication Services companies and is very heavily concentrated in a few mega-cap companies.

In the GXPC ETF, Alphabet is among the largest holdings, with Alphabet Class A (GOOGL) accounting for 31.34% and Alphabet Class C (GOOG) representing another 24.85% of the portfolio. Combined, the two share classes give Alphabet a 56.19% weighting, making the ETF heavily exposed to the company’s AI, cloud and digital advertising businesses.

GXPC has assets under management worth $118.1 million and an expense ratio of 0.15%. The fund trades at an average daily volume of almost 187,100 shares. GXPC presently carries a Zacks ETF Rank #3 (Hold).

American Century Focused Dynamic Growth ETF FDG is an actively managed ETF focused on high-growth U.S. companies, with the second-highest weightage of GOOG. Alphabet takes about 16% of the fund.

FDG has assets under management worth $424.6 million and an expense ratio of 0.45%. The fund trades at an average daily volume of almost 17,000 shares.

ETFs in Semiconductor Sector

VanEck Semiconductor ETF SMH is a U.S.-listed ETF that gives investors concentrated exposure to the semiconductor industry.

SMH must be closely watched, as it has significant exposure to NVDA and AVGO, with weights of 22.11% and 6.72%, respectively, suggesting that the ETF could be impacted by Alphabet’s recent decision.

SMH has assets under management worth $71.1 billion and an expense ratio of 0.35%. The fund trades at an average daily volume of almost 12 million shares. SMH presently sports a Zacks ETF Rank #1 (Strong Buy).

Strive U.S. Semiconductor ETF SHOC is a U.S.-listed ETF that provides focused exposure to the semiconductor industry, such as the companies supplying chips, memory, networking and equipment needed to build AI infrastructure. It seeks to track the Bloomberg US Listed Semiconductors Select Index.

This ETF also has significant exposure to NVDA, AVGO and MU, with weights of 21.65%, 12.14% and 12.08%, respectively.

SHOC has assets under management worth $240.3 million and an expense ratio of 0.40%. The fund trades at an average daily volume of almost 23,000 shares. SHOC presently carries a Zacks ETF Rank #2 (Buy).

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This article originally published on Zacks Investment Research (zacks.com).

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