As Lumentum gears up for earnings, here's a sign the optical trade is clawing back

By Hannah Pedone

A photonics-themed ETF saw better demand in its first trading day than a popular memory ETF did at the same point in its life cycle

Lumentum reports quarterly earnings after Tuesday's closing bell.

The optical sector has heated up again ahead of earnings, judging in part by a new ETF that's exciting investors.

Roundhill Investments generated some attention in April when it launched its "DRAM" ETF DRAM to a rousing reception from investors wanting exposure to memory stocks. The firm said its new Roundhill Photonics & Optics ETF LYTE got off to an even more blazing start.

On its first trading day on Aug. 6, LYTE traded $76.7 million in volume, while DRAM traded $69.5 million in volume on its first trading day. LYTE traded more than $100 million on its second day, though it cooled off in Monday's trading action.

That momentum dovetailed with a broader bout of renewed interest in optical stocks.

The next big catalyst could be earnings season. Lumentum Holdings (LITE), which has a 14.82% weighting in the LYTE ETF, and Coherent (COHR), which has a 15.99% weighting, are expected to release their fiscal fourth-quarter earnings results after the close of trading Tuesday and Wednesday, respectively. Their shares have gained 113.5% and 70.6%, respectively, so far this year, though they're off their recent highs.

Dave Mazza, CEO of Roundhill Investments, told MarketWatch that when comparing memory stocks and photonics stocks, the "parallels hold" on a structural level.

He noted that for both sectors, there's "concentrated supply, capacity that cannot flex quickly, order books extending into 2028, and the same hyperscaler budgets funding all of it."

Mazza said that Nvidia's $4 billion combined investment into two of its optical suppliers, Coherent and Lumentum, is direct evidence that demand has outrun supply. The investments, announced in March, were meant to help expand laser capacity.

"Customers do not fund their vendors' factories unless the constraint is real," he said.

Yet one thing that distinguishes the optical sector, according to Mazza, is that optical modules are "engineered and qualified into a specific customer's platform," which he said makes customer relationships more durable and pricing less volatile compared with the memory market.

Optical modules, or optical transceivers, are networking hardware components that convert electrical signals to optical light signals and back.

Needham analyst Ryan Koontz told MarketWatch that all of the companies in the ETF's holdings are "current or potential leaders in supplying foundational technologies in AI/cloud infrastructure."

"I've been highly bullish, so none of the excitement about this sector is surprising now." While he noted that earnings are important, AI spending is the bigger driver for these stocks, and right now customer demand looks "insatiable."

That said, optical stocks can be volatile, and ETFs tracking them may follow a similar pattern. While the LYTE ETF got out of the gate strong in its first two trading days, it pulled back sharply on Monday, falling more than 8%.

See also: Software stocks are fading - but these 4 could shine through the rest of the year

-Hannah Pedone

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08-11-26 0746ET