The Roundhill Photonics and Optics ETF (LYTE) is launching to capture rapid growth in optical networking for AI data centers, following the massive success of Roundhill’s Memory ETF (DRAM), which amassed tens of billions of dollars since April, according to Roundhill Investments. The new fund targets optical networking — the transmission of data between processors using light pulses in fiber-optic systems rather than conventional electrical signals — as AI data center developers seek faster, more energy-efficient alternatives to traditional copper wire connections.
Why AI Data Centers Are Transitioning to Optical Networking
Traditional copper wire connections produce excessive heat, cause signal loss, and limit computing power scalability as artificial intelligence demands surge. According to industry experts, optical networking bypasses these physical limitations by utilizing lasers, optical fibers, modulators, and connectors to build enhanced fiber-optic network structures. Alvin Nguyen, senior analyst at Forrester, noted to CNBC that photonics allows companies like Nvidia to scale AI infrastructure without the massive energy costs associated with electrical and copper cabling, preventing a performance wall.
Did you know? Goldman Sachs projects that the total addressable market opportunity for optical networking will grow more than ninefold between 2026 and 2028, surging from an estimated $15 billion to an estimated $154 billion.
Major Industry Investments in Photonics Technology
Nvidia has committed at least $6.5 billion to photonics companies since March, including financial stakes in Coherent and Lumentum. Additionally, Nvidia invested $2 billion into Marvell Technology, which Huang previously highlighted as a potential trillion-dollar company for manufacturing silicon chips that use light instead of electricity. Nvidia’s upcoming Feynman GPU microarchitecture, slated for a 2028 release, represents a major pivot away from copper and toward photonics to improve data center interconnectivity.
Publicly traded photonics corporations have experienced substantial market capitalization gains. According to market data, shares of Lumentum and Nlight have both risen by over 100% this year, while Coherent shares are up over 66%.
Comparing Photonics ETF Offerings
Roundhill is not the first manager to launch a photonics-focused fund. Tema ETFs launched the LAZR Photonics & Optics ETF (LAZR) on June 30. While LAZR has accumulated roughly $18 million in assets, Roundhill brings a strong recent track record, notably its DRAM fund reaching $10 billion in assets within 10 days of its April launch.
| ETF Name | Launch Date | Top Holdings |
|---|---|---|
| Tema LAZR Photonics & Optics ETF (LAZR) | June 30 | Lumentum (14.95%), AXT (11.26%), Anthropic (11.04%), Aixtron (8.20%), Applied Optoelectronics (5.07%) |
| Roundhill Photonics and Optics ETF (LYTE) | Thursday | Not yet disclosed |
“By Feynman, system bandwidth requirements are expected to rise to more than four times today’s levels, with light moving deeper into the system to connect more than 1,000 GPUs,” Hong Yi Chen, an investment partner at Tema, wrote in a blog post at the time of LAZR’s launch, adding that copper may struggle to deliver required bandwidth, distance, and power efficiency at that scale.
Pro Tip: Todd Rosenbluth, head of research at VettaFi, advises that advisors and investors increasingly use thematic ETFs tactically to add long-term growth, typically allocating three to four thematic funds to represent about 10% of a broader portfolio alongside core S&P 500 or Nasdaq 100 holdings.
Investment Risks and Sector Volatility
Investing in funds like LYTE and LAZR carries distinct risks, primarily due to recent volatility in the AI sector. The market growth of photonics and optics companies relies heavily on the AI buildout continuing without significant setbacks or market disruptions. According to Todd Rosenbluth of VettaFi, while thematic ETFs can experience volatility when specific trends fall out of favor, the long-term persistence of the AI buildout acts as a strong tailwind. Investors must maintain diversification to avoid overexposure to a single market segment.
Frequently Asked Questions
What is optical networking in AI data centers?
Optical networking transmits data between processors using light pulses in fiber-optic systems instead of conventional electrical signals, offering faster speeds, higher energy efficiency, and longer transmission distances.
Why are tech giants investing in photonics?
Companies like Nvidia invest in photonics to bypass the physical limitations of traditional copper wire connections, which produce excessive heat and signal loss, thereby enabling scalable AI infrastructure without prohibitive energy costs.
How do thematic ETFs fit into a broader portfolio?
According to VettaFi head of research Todd Rosenbluth, investors use thematic ETFs tactically to supplement core equity holdings like S&P 500 or Nasdaq 100 funds, typically limiting thematic allocations to roughly 10% of a diversified portfolio.
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