DVx weighted ETFs by each industry's bill of materials

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 59:57

   Yeah. This is a crazy example in financial products. I was being interviewed on CNBC about two years ago about super cycles, about how lucky we are to be alive right now. There are so many super cycles happening that make it a great time to be an investor. If we were alive 100 years ago, we got the industrial revolution. That's all we got. But we're alive today and we get AI, electrification, robotics, space, biotech, all this stuff happening at the same time.

2. 1:00:29

   So it's a great time to be an investor. And the interview stops, and Joe Kernan and Andrew Ross Sorkin turn to me and say, how do we invest? And I said, well, I'm sure there are thematic ETFs on each of these super cycles. I'll tell you what, I'll look at a few. I'll text you back some ideas. So, I get in the car to come across town from Times Square down to our office in the meatpacking, and I start to look at different exchange-traded funds, ETFs.

3. 1:00:56

   So, it turns out there are more ETFs than stocks traded. It's how people trade and invest these days. And so, I open up the largest electrification ETF, and the top five holdings are Amazon, Google, Microsoft, NVIDIA, and Apple. And I looked at those, and I'm like, those have nothing to do with electrification. There's none of that in the grid. There's none of that in an electric car. We can't put a $20,000 NVIDIA chip in a car.

4. 1:01:22

   We couldn't afford to sell the car. And that's like the Mag-7. So why would somebody pay for an electrification supercycle ETF and get the Mag-7 and not get exposed to the people who are actually building the grid? Well, first of all, I called Andrew and Joe and said, don't invest in these products because they're terrible. But I have another idea. And so I started with the first step of the algorithm, which is question requirements.

5. 1:01:47

   And the whole ETF business is built up around the first ETF, which was Vanguard. We had the S&P 500 ETF. And they did the S&P 500 based on market cap weighting. So big companies get bigger weights in that index and small companies get smaller weights. And since that time, almost all ETFs have been built on a market cap weighted basis. My idea was that doesn't work for emerging industries. Because you might have one big company like NVIDIA in the AI super cycle who's worth $4 trillion.

6. 1:02:21

   You may have one little company that's providing all of the fiber to these AI data centers who gets no exposure in that ETF because of a market cap weighting approach. So I started to call everybody I knew in the ETF industry and that I could get introduced to and said, why do you build these ETFs with market cap weights? isn't there another way? And they all said, no, no, this is the way it's done. It's all, it's been done this way since Vanguard. And so everybody does it this way. It's the only way you can do it. I'm like, I don't really agree with that. I think like if I wanted to give investors exposure to profits, I'd take the build sheet of an AI data center and figure out who provides the fiber, who provides the power electronics, who provides the networking software, who provides the high bandwidth memory. And I would wait the ETF on their contribution to

7. 1:03:12

   like the AI data center or their contribution to the grid or their contribution to the satellite. And so just take the build sheet. In manufacturing terms, we call that the bill of material. So we started to build ETFs based on the bill of material. It turns out in an AI data center, there are 60 stocks that provide all the stuff that go into an AI data center, 30 international, 30 domestic. Turns out about the same number that provide the grid infrastructure. About similar number provide the defense infrastructure, space, et cetera. So we built a series of ETFs that were the first not built on a market cap weighted basis, but built on this bill of materials weighted basis. And it turns out it's pretty superior because you're exposing the investor to these profits so we have the number one performing ai infrastructure etf that is traded on the market

8. 1:04:05

   we have the number one electrification we've just released robotics in space so that's a really not recent non-manufacturing example of how you can start with questioning requirements and end up with a very different product idea and invent something that hasn't been invented before turns us pretty superior so like for investors we've like i feel great because somebody that