Micron Technology, one of the world's leading memory chip makers and a poster child for the artificial-intelligence stock rally, reports earnings Wednesday afternoon. How the company fares will help determine what's next for the Roundhill Memory ETF, one of the most successful launches of all time for a new exchange-traded fund.
The ETF, which traders often refer to by its ticker symbol of DRAM, has come far since its early April debut, attracting $26 billion in assets under management in a little less than six months. But the risks are high for the popular fund heading into the report-thanks to its high concentration in Micron and a few other volatile stocks, questions about AI demand, and the growing number of competing funds.
Micron is the actively managed fund's largest holding, with a more than 26% weighting, while South Korean rivals Samsung and SK Hynix make up the second- and third-largest positions. Combined, these three stocks account for nearly three-quarters of the fund's assets. That means there is a lot riding on Micron's results for the ETF.
DRAM's price has more than doubled since it launched, but is still more than 25% below its all-time high from June. That makes the fund even more volatile than the broader iShares Semiconductor ETF, or SOXX, which has Micron as its third-largest holding. The SOXX is about 14% below its 52-week high.
Dave Mazza, CEO of Roundhill Investments, told Barron's that he isn't concerned about the big swings in memory stocks.
"Memory remains a compelling opportunity from a valuation standpoint," Mazza said. "And while volatility comes with the territory, the flows we've seen during pullbacks suggest investors are treating them as entry points," Mazza said.
He has a point on valuation. The DRAM ETF currently trades for just five times earnings estimates for the next 12 months, down from a peak valuation of 10 times earnings in June. This is also a much lower multiple than that of the S&P 500, which trades at 19 times earnings estimates.
Still, Micron and other memory chip companies have historically been highly cyclical. They often look cheap near a top-when they are in boom times and generating strong earnings. The question is how much longer this robust growth can last.
There have been several copycat memory ETFs that have launched since then too. So there is clear interest in this subsector of chips. None of the new funds have captured the zeitgeist in the way that DRAM has. But competitors are hoping to differentiate themselves in this crowded field-another reason DRAM investors hope that Micron's momentum continues.
Matthew Tuttle, CEO of Tuttle Capital Management, told Barron's that the Tuttle Capital Concentrated Memory Stack ETF, which launched in June, focuses more on picks-and-shovels plays that benefit from rising capital expenditures related to AI. For instance, chip and testing equipment companies and infrastructure firms like Advantest, Onto Innovation, and Penguin Solutions are among the fund's top five holdings.
The Tuttle fund, with just under $27.7 million in assets, is exposed to the big memory players, too, though. In fact, Micron is the largest holding, making up about 10% of the portfolio. SK Hynix's U.S.-listed shares are a top position too, accounting for 5.5% of assets.
That fund is down about 3% since it launched, but that isn't as bad as the 13% drop for DRAM during that span. Tuttle chalks up the recent relative outperformance to the fact that his firm's ETF is "not as Korea-dominant and not nearly as top heavy."
There are other memory stock ETF options as well that are trying to ride DRAM's coattails. The Kurv Memory Select ETF, which launched in late June, also leans heavily on the South Korean leaders. More than 20% of the fund's $30 million in assets are in SK Hynix and another 7% is in Samsung. That hasn't worked too well so far: The ETF has fallen about 13% since its late June launch.
Kurv CEO Howard Chan told Barron's that the fund "offers the most targeted exposure to the companies best-positioned at the intersection of AI-driven demand and constrained memory supply." He added that the fund's recent declines are roughly in line with other memory ETFs.
The Tema Memory ETF, which has attracted nearly $90 million in assets, has also been a disappointment, dropping more than 20% since it launched in late June. The fund has flash memory company Sandisk, SK Hynix, and Japan's Kioxia as its top three holdings, which collectively make up a little more than half of the ETF's assets.
These smaller memory-focused ETFs could get a big lift if Micron's stock resumes its explosive rally after earnings and the rest of the tech sector follows suit. But so would DRAM, which has the first-mover advantage and the biggest exposure to Micron.
Strong results from Micron could be the catalyst to reignite the memory chip rally and get DRAM back on track. After all, the fund surged 10% in late June following Micron's previous earnings report.
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