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AI borrowing is surging as Big Tech ramps up spending on data centers.
Data-center and infrastructure ETFs can benefit from rising AI power demand.
Free-cash-flow ETFs offer a quality-focused way to navigate AI debt risks.
The world’s biggest technology companies have plenty of cash, but even their massive balance sheets are starting to feel stretched by the cost of the artificial intelligence (AI) boom.
Alphabet, Meta, Amazon, Microsoft and other tech giants are increasingly borrowing money to fund their aggressive spending on AI chips, servers and data centers. What was barely a factor in 2024 has quickly turned into a major source of demand in corporate bond markets.
Tech companies have borrowed roughly $500 billion in the first nine months of this year, and Goldman Sachs expects that figure to climb sharply, reaching about $1.2 trillion in 2027, per AFP, quoted on Yahoo Finance.
According to Chris Della Fave, senior vice president at fundraising advisory firm Post Oak Group, AI-related borrowing now represents around 25% of all corporate bond issuance, compared with just 4% two years ago, mentioned in the same Yahoo Finance source.
AI Borrowing Is Reaching Historic Levels
In inflation-adjusted terms, AI-related companies are expected to borrow more this year than U.S. cable operators raised to build out the internet. Much of this money is going toward infrastructure that is still being built, from massive data centers to the advanced computing systems needed to train and run AI models.
What Are the Risks?
The timing is particularly important because Treasury yields have already climbed sharply.
The 10-year U.S. Treasury yield has moved above 5.30%, reaching its highest level since 2002. The benchmark rate influences borrowing costs throughout the economy, including corporate debt. Inflation concerns are adding to the pressure.
For now, investors remain willing to fund the AI spending boom. But the combination of record-scale corporate borrowing, elevated Treasury yields and persistent inflation risks could make the next stage of the AI investment cycle increasingly expensive for both companies and financial markets.
How to Play the AI Debt Boom?
Investment-Grade Corporate Bonds: Investors can enjoy elevated yields while avoiding some of the duration risk created by rising Treasury rates. Pacer US Cash Cows Bond ETF (MILK - Free Report) , BondBloxx BBB Rated 10+ Year Corporate Bond ETF (BBBL - Free Report) and FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR - Free Report) yield 7.25%, 6.21% and 6.30% annually, while they charge 49 bps, 19 bps and 15 bps, respectively.
AIData centers & Power: These companies are beneficiaries of the enormous electricity and infrastructure demand created by AI. These businesses can benefit even if the eventual AI winners change.
Free-Cash Flow Rich Companies: Companies taking on large amounts of debt need strong cash flows to service that debt. Investors should therefore pay attention to free cash flow, rather than just AI-related revenue growth. Free cash flow rich companies offer quality exposure.
Invesco Nasdaq Free Cash Flow Achievers ETF (QOWZ - Free Report) tracks the index that has had positive free cash flow in each of the trailing 11 years. This new ETF is up 3.3% over the past week and has added 2.8% over the past month.
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Image: Bigstock
AI Debt Boom: ETF Areas to Play
Key Takeaways
The world’s biggest technology companies have plenty of cash, but even their massive balance sheets are starting to feel stretched by the cost of the artificial intelligence (AI) boom.
Alphabet, Meta, Amazon, Microsoft and other tech giants are increasingly borrowing money to fund their aggressive spending on AI chips, servers and data centers. What was barely a factor in 2024 has quickly turned into a major source of demand in corporate bond markets.
Tech companies have borrowed roughly $500 billion in the first nine months of this year, and Goldman Sachs expects that figure to climb sharply, reaching about $1.2 trillion in 2027, per AFP, quoted on Yahoo Finance.
According to Chris Della Fave, senior vice president at fundraising advisory firm Post Oak Group, AI-related borrowing now represents around 25% of all corporate bond issuance, compared with just 4% two years ago, mentioned in the same Yahoo Finance source.
AI Borrowing Is Reaching Historic Levels
In inflation-adjusted terms, AI-related companies are expected to borrow more this year than U.S. cable operators raised to build out the internet. Much of this money is going toward infrastructure that is still being built, from massive data centers to the advanced computing systems needed to train and run AI models.
What Are the Risks?
The timing is particularly important because Treasury yields have already climbed sharply.
The 10-year U.S. Treasury yield has moved above 5.30%, reaching its highest level since 2002. The benchmark rate influences borrowing costs throughout the economy, including corporate debt. Inflation concerns are adding to the pressure.
For now, investors remain willing to fund the AI spending boom. But the combination of record-scale corporate borrowing, elevated Treasury yields and persistent inflation risks could make the next stage of the AI investment cycle increasingly expensive for both companies and financial markets.
How to Play the AI Debt Boom?
Investment-Grade Corporate Bonds: Investors can enjoy elevated yields while avoiding some of the duration risk created by rising Treasury rates. Pacer US Cash Cows Bond ETF (MILK - Free Report) , BondBloxx BBB Rated 10+ Year Corporate Bond ETF (BBBL - Free Report) and FlexShares Credit-Scored US Long Corporate Bond Index Fund (LKOR - Free Report) yield 7.25%, 6.21% and 6.30% annually, while they charge 49 bps, 19 bps and 15 bps, respectively.
AI Data centers & Power: These companies are beneficiaries of the enormous electricity and infrastructure demand created by AI. These businesses can benefit even if the eventual AI winners change.
Global X Data Center & Digital Infrastructure ETF (DTCR - Free Report) and iShares Global Infrastructure ETF (IGF - Free Report) yield 0.90% and 3.11% annually, respectively. These ETFs charge 50 bps and 37 bps in fees, respectively. Global X U.S. Infrastructure Development ETF (PAVE - Free Report) yields 0.80% annually and charges 47 bps in fees (read: AI Super-Cycle Fuels Record Infrastructure Investments: ETFs to Buy).
Free-Cash Flow Rich Companies: Companies taking on large amounts of debt need strong cash flows to service that debt. Investors should therefore pay attention to free cash flow, rather than just AI-related revenue growth. Free cash flow rich companies offer quality exposure.
Invesco Nasdaq Free Cash Flow Achievers ETF (QOWZ - Free Report) tracks the index that has had positive free cash flow in each of the trailing 11 years. This new ETF is up 3.3% over the past week and has added 2.8% over the past month.