5G Digital Infrastructure ETF Report | Apr 2024

5G ETF Key Takeaways

  • The Digital Infrastructure and Connectivity index extended February gains an additional 3.76% in March. From an advance/decline perspective, there was a fair amount of participation as 33 names saw gains while 26 lost ground during the month.
  • Digital Processing led sectors again in March, contributing to just over 87% of period returns.
  • Despite the dominance of the Digital Processing sector, the list of top ten contributors to performance in March saw representation from all remaining sectors except for Data Centers.
  • Digital Processing names like Nvidia (NVDA) [14.22%] might have dominated headlines, Digital Solutions & IP names like Super Micro Computer (SMCI) [16.62%] and Digital Transmission name Infinera (INFN) [20.12%] also contributed to performance this month.
  • Digital Transmission and Data Centers were the only lagging segments. Detractors from performance included Ciena (CIEN) [-13.22%] as well as Comtech Telecom (CMTL) which fell 49.26% after the company posted a poor quarter and weak forward guidance.

Source of all performance data: Tematica Research / Bloomberg. Data as of 31.03.2024. Please note that all performance figures are showing net data. Past performance is not indicative of future performance and when you invest in ETFs your capital is at risk.

Macro Outlook

The main driver of this strategy is the Virtuous Circle of capacity creating opportunity and opportunity, once seized, prompting the need for more capacity. As thematic researchers, we break the economy into three components: consumers, corporations, and public policy. When we see consumers and corporations pulling in the same direction, we know we have a solid investing theme. When public policy joins them, setting performance thresholds or providing development incentives such as public works projects, the momentum of all three creates powerful thematic tailwinds, precisely what we see for digital infrastructure development.

Confirmation points supporting our theory and view of the Virtuous Circle are increasingly abundant. Below are just some that we’ve seen over the past month that in our view not only support our position but also get us energized about both the near- and long-term prospects for this strategy:

The Register[1] – “Spending on edge computing is growing fast and because it’s 2024, analyst firm IDC believes AI is a big reason for the boost. “Edge computing will play a pivotal role in the deployment of AI applications,” wrote IDC analyst Dave McCarthy. “To meet the scalability and performance requirements, organizations will need to adopt the distributed approach to architecture that edge computing provides. OEMs, ISVs, and services are taking advantage of this market opportunity to enable AI in edge locations.” That need for distributed scale means that by 2027 IDC predicts global spending on edge compute will approach $350 billion – well beyond its expected $232 billion spend in 2024, which itself represents 15.4 percent growth over 2023.”

ZDNET[2] – “5G is expected to account for 51% of mobile connections in 2029, before hitting 56% the following year, according to the latest figures from GSMA Intelligence. 5G, which began commercialization in 2019, is the fastest-growing mobile technology, exceeding one billion connections in 2022 and climbing to 1.6 billion connections last year. It is projected to reach 5.5 billion by 2030. It took 4G nine years to hit 1.5 billion users. However, the adoption of 5G has encountered some bumps and the technology has failed to gain significant traction among enterprises. Industry players believe this situation will change with 5.5G or 5G-Advanced networks, which are expected to see commercial rollouts this year.”

Datacenter Dynamics[3] – “Speaking over the week at the South by Southwest conference (SXSW 2024) and reported by AI Business, CEO Michael Dell said: “There definitely needs to be a big build-out of data center capacity for sure.” He added: “We could need 100 times more of this in 10 years than we have today.” Dell attributed the increase in data center demand to the rising interest in AI services and explained that people will learn that they can get better results from generative AI models. He said we are only in the first or second year of “the big AI revolution” and predicted that the growth of AI will be 10x faster than the growth rate of the Internet.”

We’ve been talking about US government infrastructure spending for a while now, and we’re seeing some of those awards start to hit as evidenced by the following:

Bloomberg[4] – “The US will award Intel Corp. $8.5 billion in grants and as much as $11 billion in loans to help fund an expansion of its semiconductor factories, the Commerce Department announced Wednesday, marking the largest award from a program designed to reinvigorate the domestic chip industry. The package will support more than $100 billion in US investments from Intel, including efforts to produce cutting-edge semiconductors at large-scale plants in Arizona and Ohio, the department said on Wednesday. The money also will help pay for equipment research and development and advanced packaging projects at smaller facilities in Oregon and New Mexico.”

NIST[5] – “The US Department of Commerce and TSMC Arizona Corporation have signed a non-binding preliminary memorandum of terms to provide up to $6.6 billion in direct funding under the CHIPs and Science Act. This proposed funding would support TSMC’s investment of more than $65 billion in three greenfield leading edge fabs in Phoenix, Arizona.”

Wall Street Journal[6] – “South Korea’s SK Hynix plans to invest roughly $4 billion to build an advanced chip-packaging facility in West Lafayette, Ind., according to people familiar with the matter, a boost to the Biden administration’s ambitions to restore America’s standing as a semiconductor power.”

These and other developments keep us optimistic that while we are going through some economic uncertainty, we remain excited about funding beginning to flow for promised infrastructure spending. That legislation and other bills will spur more demand for bandwidth, processing, and storage and reinforce the Virtuous Circle. This focus on the development of a nation’s digital infrastructure as vital to its future competitiveness is evident in many countries around the world, and as we look forward to emerging technologies, it will only become more critical.

5G ETF Performance Table
As of 31.03.2024

Digital Infrastructure and Connectivity UCITS ETF 3.73%9.07%27.74%9.07%21.63%4.99%26.59%
Tematica BITA Digital Infrastructure and Connectivity Index3.76%9.22%28.42%9.22%22.52%6.97%29.64%

Please note that all performance figures are showing net data. Source: Bloomberg / HANetf. Data as of 31/03/2024.

Performance before inception is based on back tested data. Back testing is the process of evaluating an investment strategy by applying it to historical data to simulate what the performance of such strategy would have been. Back tested data does not represent actual performance and should not be interpreted as an indication of actual or future performance. Past performance for the index is in USD. Past performance is not an indicator for future results and should not be the sole factor of consideration when selecting a product. Investors should read the prospectus of the Issuer (“Prospectus”) before investing and should refer to the section of the Prospectus entitled ‘Risk Factors’ for further details of risks associated with an investment in this product. When you invest in ETFs and ETCs your capital is at risk.

[1] https://www.theregister.com/2024/03/14/idc_charts_bright_future_for/

[2] https://www.zdnet.com/article/5-5g-touted-as-the-network-to-bring-improved-enterprise-connectivity/

[3] https://www.datacenterdynamics.com/en/news/michael-dell-ai-to-drive-data-center-demand-up-100-fold-over-next-10-years/

[4] https://www.bloomberg.com/news/articles/2024-03-20/intel-wins-almost-20-billion-in-chips-incentives-for-us-plants?srnd=homepage-americas&sref=dHEjqCC7

[5] https://www.nist.gov/news-events/news/2024/04/biden-harris-administration-announces-preliminary-terms-tsmc-expanded

[6] https://www.wsj.com/tech/nvidia-partner-plans-4-billion-investment-in-indiana-4a094ace?mod=hp_lead_pos10