Megacap tech firms and the other so-called AI “hyperscalers” have been key drivers of market performance this year. That has inspired much discussion about whether there is an “AI bubble” looming over portfolios. While investors and advisors can have their opinions about whether or not that is the case, another specter looms over the other side of the 60/40: AI company debt and AI bonds.
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According to reporting from the Wall Street Journal, AI hyperscalers Amazon (AMZN), Alphabet (GOOGL), Oracle (ORCL), and Meta (META) have issued just under $90 billion in bonds. That total comes in higher than the total they’d sold over the last 40 months, the paper noted. Investors and advisors have taken note, with investors asking for higher yields from AI bonds than in previous months.
What Shifting AI Bonds Outlook Means for Investors
What does that mean for investors, then? Per Reuters, some analysts have noted that the sheer amount of investment-grade issuance from these firms could impact the overall investment grade landscape. That would complicate an uncertain rate outlook already facing a divided Fed and stubborn inflation, let alone potential further politicization of the central bank.
Active ETFs may be able to help address risk stemming from AI bonds proliferation. Where many investors currently lean on passive bond funds to construct their overall debt allocations, active ETFs offer some key advantages. To begin with, ETFs provide greater tax efficiency and flexibility than mutual funds. Their tax advantages owe to their creation/redemption mechanism, which doesn’t produce taxable events like funds do when fund shares are sold.
Most important, however, is active ETFs’ active investing freedom. Active ETFs can not only adapt to events or market shifts, like concern about credit quality, but also lean on fundamental research to get a deeper view into issuer health.
While concern about AI bonds doesn’t necessarily stem from concern about AI tech firms’ overall health, that can be a large factor. On a basic level, too, where passive funds can struggle to maintain their bond allocations if bonds are called early, active funds can quickly adjust. The end of the year presents an opportunity for investors to refresh their portfolios. For those who remain largely exposed to passive, the new year may invite investors to shift into active.
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