On July 21, Defiance launched the Defiance AI Hyperscale Leaders ETF (AIHY), with an expense ratio of 76 basis points. The fund provides actively managed exposure to the companies that are leaders in enabling, developing, or benefiting from artificial intelligence growth. AIHY targets companies that focus on scaling profitability from AI development, rather than those simply attached to the AI narrative.
Key Takeaways
- Defiance has launched the Defiance AI Hyperscale Leaders ETF (AIHY), targeting the companies successfully scaling revenue and profitability from the AI infrastructure buildout, rather than those simply benefiting from the broader AI growth.
- AIHY requires companies derive at least 50% of revenues, assets, or spending tied to AI development.
- Hyperscalers continue to accelerate their capital-intensive buildout of physical AI infrastructure, with UBS estimates projecting spending to rise from $637 billion in 2026 to $843 billion in 2027.
Focus on Scaling AI Profitability
While the capital expenditures related to AI infrastructure are driving broad market growth, not every company involved in the AI space is actively scaling revenue. AIHY combats this by screening for companies with at least 50% of revenues, assets, or capital expenditures coming from AI development.
To target firms scaling operations, the fund requires its individual holdings’ revenue to grow faster than operating expenses. It also mandates that holdings demonstrate positive year-over-year revenue growth and a positive gross profit margin, both based on the most recent fiscal quarter.
The fund maintains a concentrated portfolio of 10–50 constituents, with five holdings currently making up over 90% of the portfolio’s allocations. The fund’s top holding is Amazon (AMZN), with a 20.05% portfolio weight, included in the fund for its Amazon Web Services (AWS) business.
That AWS component is expected to direct $200 billion dollars toward AI Infrastructure development in 2026. Amazon also meets the overall revenue requirements of the fund, posting a strong 17% year-over-year revenue growth and a positive gross margin of approximately 52% in first quarter earnings.
Balancing AI Spending and Free Cash Flow
The AI story has moved from speculative software to capital-intensive physical infrastructure. As this transition accelerates, hyperscalers are increasingly investing in the buildout of the compute capability required to train and run AI models. Hyperscalers are expected to spend $637 billion on AI development in 2026, with capital expenditures projected to reach $843 billion in 2027, according to UBS estimates.
With AI spending continuing to grow, investors are increasingly demanding sustainable revenues from these investments. The free cash flows for these hyperscalers are declining at an alarming rate, with current analyst estimates suggesting that rolling 12-month free cash flow for the hyperscalers could approach zero by early 2027, according to T. Rowe Price Analysis.
As these hyperscalers prepare to report second quarter earnings in the upcoming weeks, the next few months will be crucial. Will they be able to monetize AI investments at a rate where free cash flow remains strong enough to support increasing spending levels?
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