Memory Mania: A New ETF for a Hot AI Trade

Spend enough time evaluating artificial intelligence (AI) and individual AI stocks, and an investor is likely to hear the word "bottleneck." It's basically corporate lingo referring to something hyperscalers and other AI companies need that's in short supply. Computing power and available data center space are prime examples.

More recently, the AI bottleneck conversation shifted to memory, with profound implications for select semiconductor stocks, but not the ones many investors are thinking of. Put simply, AI computing power has advanced so rapidly that there are now major constraints on data storage and transmission.

The aptly tickered Roundhill Memory ETF (NYSEMKT: DRAM) attempts to capitalize on the memory bottleneck theme. Let's take a closer look at it.

This new ETF taps into a hot theme, but investors need to know the details. Image source: Getty Images

Following big run-ups by stocks like SK Hynix and Micron Technology (NASDAQ: MU), this new exchange-traded fund (ETF) is rapidly attracting a following. It debuted on April 2, so it doesn't even have two full trading weeks under its belt, but as of April 9, it had $245 million in assets under management, confirming a fast start.

DRAM deep dive

Tech enthusiasts know that this ETF's ticker refers to dynamic random access memory, an important technological concept because DRAM is the memory system supporting AI servers. Potentially adding to the allure of this new ETF is the tightening of DRAM supply amid accelerating demand.

Another source of attraction with the Roundhill ETF is that it's a first-of-its-kind fund. That's right. In the expansive landscape of tech ETFs, this is the first dedicated to memory chipmakers.

That's a good segue into another point. This "infant" ETF seizes on the theme of access. The memory chip space is dominated by SK Hynix, Micron, and Samsung Electronics. In traditional semiconductor ETFs, Micron is overshadowed by Nvidia, among others, and investors seeking significant exposure to Samsung and SK Hynix were forced to turn to South Korea ETFs, which aren't dedicated semiconductor or tech funds.

Said another way, the Roundhill ETF solves an access problem for investors who don't want to pick individual stocks but still want in on the memory trade.

Know what you own

This ETF is interesting, and there's no denying it's a pioneer of sorts, but those accolades don't imply prospective investors can gloss over potential pitfalls. For example, it must be noted that this ETF is heavily concentrated.

Owing to the dearth of investable memory stocks on the market today, this actively managed ETF holds just nine stocks. Compounding the lack of diversification issue is the fact that SK Hynix, Micron, and Samsung combine for 73% of the ETF's portfolio. If one or two of those stocks sneeze, the whole ETF could catch a cold.

There are other issues to ponder. In broad terms, thematic ETFs, of which the Roundhill fund is one, often struggle to outpace basic broader market benchmarks over extended time frames. Some critics of these funds assert that the launches of niche ETFs often mark the top of the underlying theme. To be fair, there is no guarantee those issues will affect the Roundhill ETF.

But what's not up for debate is that this isn't a cheap ETF. It charges 0.65% annually, or $65 on a $10,000 investment. That's more than what many investors are accustomed to shelling out with ETFs.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology and Nvidia. The Motley Fool has a disclosure policy.