Memory stocks are red-hot right now, led by juggernauts like Sandisk (SNDK +3.25%), Western Digital (WDC +0.01%), Seagate Technology (STX 0.10%), and Micron Technology (MU +5.07%), which are racking up triple-digit year-to-date returns.
Two months ago, a new exchange-traded fund (ETF) was launched to tap into the incredible growth from this industry: the Roundhill Memory ETF (DRAM +1.01%). Investors have certainly taken notice, as the ETF has already amassed $10 billion in assets since its April 2 launch, making it one of the fastest-growing new ETFs ever.
The Roundhill Memory ETF is actively managed, focusing on memory and storage chip companies from around the world, not just the U.S.
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"Memory is a critical bottleneck of the AI [artificial intelligence] revolution, supported by a secular shift toward data-intensive applications and sustained demand growth," the ETF fact sheet states. "DRAM provides investors with global exposure to a targeted basket of leading memory producers, positioned at the center of AI-driven demand for faster, more efficient data processing and storage."
Roundhill promotes the DRAM fund as the first pure-play ETF that focuses exclusively on memory chip stocks. But investors should be aware that this popular new ETF is riskier than most.
Up 90% since it launched
The Roundhill Memory ETF has only been around for about seven weeks, and already it has generated a 90% return, surging to about $52.82 per share as of May 25.
When you look at the ETFʻs top holdings, you can see why. Along with the memory stocks mentioned above -- Micron, Sandisk, Western Digital, Seagate -- the portfolio also includes major Korean chipmakers SK Hynix and Samsung Electronics, along with Kioxia from Japan, among others.
NYSEMKT: DRAM
Key Data Points
There are only about 12 to 15 holdings in the portfolio, so it is highly concentrated.
There are certainly some red flags. The narrow focus of Roundhill Memory ETF on not just semiconductors, but a subset within the space, should elicit caution. These stocks will all move in tandem, and right now they are moving aggressively higher. But that won't always be the case.
Another red flag is that roughly 74% of the portfolio is concentrated in the top three holdings -- SK Hynix, Micron, and Samsung. That's an extremely top-heavy portfolio concentrated in three similar stocks, which makes the portfolio much riskier than the typical diversified ETF -- even a typical semiconductor ETF.
A third caution flag is the use of swap agreements and derivatives to amplify its gains, including a roughly 9% swap agreement in Micron. These derivatives generally carry higher risks than direct investments in a security, so while they may juice returns during a rally, they may increase declines during a downturn.
Highly concentrated and risky
The good news is that there is a memory stock supercycle right now, where demand is outpacing supply due to the need for storage and memory for the massive AI computing infrastructure being built. That is driving the huge flows. But it will eventually peak, and there will be troughs, and this ETF will go in the other direction, perhaps aggressively so.
So, while this ETF will produce strong returns with its focus on this growth industry within the AI revolution when markets are up, it will not be without volatility. It helps that it is actively managed, so managers can make adjustments as needed. But it is highly concentrated in a specific area, so there's not going to be much diversification.
So while it is certainly not too late to invest in this ETF, investors should certainly make sure that the allocation to this concentrated, aggressive growth ETF is relatively small in a well-diversified portfolio.
