The Copper Shortage Is Real, and It Is the Metal AI Can't Live Without. Here's the Best Way to Invest.

The artificial intelligence industry continues to grow at double-digit rates. To support this growth, AI companies are building massive amounts of data center infrastructure. This infrastructure is energy-intensive, and the current grid isn't big enough to support the AI industry's long-term needs. In short, more electricity generation capacity will be needed.

Ramping up electricity production and transmission capabilities, however, also requires substantial resources. Copper is near the top of that list.

"[C]opper is essential for the generation, transmission, and use of electricity. But the demand for copper will outrun supply unless there is major adjustment across the copper supply system," warns research from S&P Global. "Copper is the connective artery linking physical machinery, digital intelligence, mobility, infrastructure, communication, and security systems. All of this has made the future availability of the metal a matter of strategic importance."

Given this, S&P Global predicts a surge of interest in copper over the coming years and decades. The firm believes the "explosive growth of AI and data centers has introduced a new, rapidly expanding vector of copper demand." Rising AI adoption, S&P Global concludes, will kick-start a "transformative trajectory for copper demand."

How can investors profit from rising copper demand? There are two obvious investment opportunities.

1. Copper mining stocks

The most direct way to expose your portfolio to rising copper demand is by purchasing copper mining stocks. Freeport-McMoRan (NYSE: FCX), for example, is the largest publicly traded mining company focused mostly on copper. Copper accounts for roughly 75% of Freeport's total revenue. Gold and molybdenum make up the majority of the remaining quarter.

The logic here is simple. Copper miners like Freeport make money by digging up copper ore and selling the ore. If copper prices rise, the value of Freeport's mining assets rises. This alone would raise the stock's intrinsic value, but it would also make it easier for the company to borrow money, issue stock at attractive prices, and potentially acquire weaker competitors. And, of course, Freeport's revenues and profit margins would rise due to higher selling prices.

Just remember that copper's rosy long-term outlook won't prevent short-term shocks.

"Overall, copper prices remain elevated compared with historical averages, but downside macroeconomic risks are largely not fully priced in," research from JP Morgan warns. "As highly cyclical assets geared to manufacturing cycles and end-use consumption in the construction, transportation, utility and white goods sectors, demand for base metals, including copper, is extremely sensitive to global economic growth."

If you take a position in a copper mining stock, it would be best to take a long-term view, potentially adding to your position during market corrections.

Image source: Getty Images.

2. Copper ETFs

There is a host of copper ETFs that allow investors to instantly gain diversified exposure to specific segments of the copper market. This way, your portfolio is more exposed to copper upside in general, not the specific execution of a single operator.

The Global X Copper Miners ETF (NYSEMKT: COPX), for example, has more than $7 billion in assets. For an annual fee of around 0.65%, investors will gain exposure to every company in the Solactive Global Copper Miners Total Return Index: a broad index with several dozen holdings designed to track the performance of global stocks involved in the exploration, mining, and refining of copper.

Investors can also gain direct exposure to copper prices through an ETF such as the United States Copper Index Fund (NYSEMKT: CPER). The ETF has an expense ratio of nearly 1%. It also issues a K-1 tax form annually, which may complicate personal tax preparation. And the ETF tracks copper prices using futures contracts, which can often come with some tracking error. But for investors looking to bet on copper itself, not copper miners, this remains an attractive choice.

The final item to note is that the market has already recognized the copper revolution. Copper prices are up 36% over the last 12 months. That performance heavily outpaces broader market indexes. Investors should understand that copper's demand dynamics will play out over many years, and that current market conditions don't necessarily provide the best entry point in recent history.

JPMorgan Chase is an advertising partner of Motley Fool Money. Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase and S&P Global. The Motley Fool has a disclosure policy.