ETFs to invest in data and tech infrastructure

Key Concepts

• AI Infrastructure Build-out: The physical and energy-related requirements necessary to support AI technology.
• "Receiver" vs. "Spender" Strategy: An investment philosophy focusing on companies that receive capital from hyperscalers (e.g., Amazon, Google) rather than the hyperscalers themselves.
• Behind-the-Meter Power: On-site electricity generation that bypasses the public grid to ensure 24/7 reliability for data centers.
• Hyperscalers: Large-scale cloud providers responsible for the massive capital expenditure in AI infrastructure.

1. Investment Framework: The Three-Part AI Story

Sean O’Hara, President of Pacer ETFs, outlines a three-pronged investment approach to the AI revolution. The core thesis is that while the ultimate profitability of AI for "spenders" (hyperscalers) remains uncertain, the "receivers" of the $3–$5 trillion in projected capital expenditure are positioned for growth.

Part 1: The Buildings (SRVR - Pacer Data & Infrastructure Real Estate ETF)

• Objective: Focuses on the physical development and management of data centers.
• Evolution: Originally launched for cloud and 5G, the fund now emphasizes the critical nature of physical real estate for AI.
• Performance: After a period of decline due to broader real estate sell-offs in a high-interest-rate environment, the fund has recovered, showing a 22% total return over the past 12 months.
• Key Components: Includes real estate investment trusts (REITs) and a "sleeve" of on-site power generation companies (e.g., GE Vernova, Caterpillar) to provide reliable, 24/7 energy.

Part 2: The Equipment (TRFK - Pacer Data & Digital Revolution ETF)

• Objective: Captures the hardware, software, and cooling systems required to fill data centers.
• Performance: Experienced a 53% increase in price over the past year.
• Scope: Includes companies involved in the technical installation and autonomous management of data centers, such as Johnson Controls.
• Logic: If SRVR provides the "shell," TRFK provides the "contents" necessary for AI functionality.

Part 3: The Energy (USAI - Pacer American Energy Infrastructure ETF)

• Objective: Focuses on the "linchpin" of the AI build-out: power generation.
• Rationale: The existing electrical grid is insufficient to handle the massive power demands of AI without causing price spikes. Therefore, power must be generated "behind the meter" on-site.
• Key Holdings: Primarily pipeline companies (e.g., Enbridge, Energy Transfer, Williams, TC Energy) and a sleeve of natural gas producers.
• Perspective: Natural gas is identified as the primary fuel source for this on-site generation due to the U.S.'s abundant supply and production capacity.

2. Key Arguments and Perspectives

• The "Receiver" Advantage: O’Hara argues that investors should avoid the "AI bubble" concerns surrounding the seven major tech stocks (the spenders) and instead invest in the companies that provide the essential infrastructure (the receivers).
• Grid Limitations: A significant argument presented is that the current public electrical grid cannot support the AI build-out. This necessitates a shift toward decentralized, on-site power generation, which creates a long-term demand for natural gas and infrastructure providers.
• Valuation: O’Hara notes that these ETFs are not trading at the "massive multiples" often associated with high-growth AI software companies, offering a more grounded way to participate in the industrial revolution of AI.

3. Synthesis and Conclusion

The Pacer ETF strategy provides a comprehensive, end-to-end investment vehicle for the AI build-out. By segmenting the market into Real Estate (SRVR), Hardware/Equipment (TRFK), and Energy Infrastructure (USAI), the firm allows investors to capture the capital flowing from hyperscalers into the physical world. The primary takeaway is that regardless of whether AI software achieves its projected transformational goals, the massive capital expenditure required to build the physical and energy-related infrastructure is already underway, creating a reliable revenue stream for the companies that build, power, and equip the digital age.