Oh my goodness, you guys need to get out of here. Sorry, my kids have just taken over the room. what's up party people? My name is Sunny Ray, the show must continue. my next guest is Kevin Carter of EMX ETF. We're going to discuss the rise of China focused AI investment opportunities and new AI-related products and how the China China-US AI race is reshaping emerging market investing. Sorry, Kevin, for the rough start. How you doing, bud?
I'm good. No problem.
Yeah.
I love your intro music and roll.
Okay. that's the second compliment I got this week, so I'm feeling good about it. I appreciate it. Thank you. So, Kevin, what are you building? Let's dive right into the deep end. What is I'm going to say it right, EMX ETF? and yeah, I guess like what what's the kind of the unique world view that you carry?
Sure. Well, you know, as you know, I'm a someone who's been focused on emerging markets for the last 20 years, and I've been focused on the technology story in emerging markets for most of that time, and I I've had a number and still have a number of emerging market internet-related ETFs, EEMQ, the principal one, but you know, the new technology wave is AI, and it's, you know, the big the biggest thing since the internet, maybe bigger, who knows? And so, we're launching a family we've started to launch a family of emerging market related AI ETFs. We've launched two so far a few weeks ago we launched the China AI Tigers LLM ETF, TGRZ, which invests in the AI models in China. And then yesterday we launched AICH, which is a full China full stack China AI strategy. So, I'm all about emerging markets and tech. And the newest shiniest tech is the AI tech.
Love it. Okay, so let's maybe slow down a little bit, Kevin. I had a bunch of questions for you. started on Wall Street in 1992. I guess what did that first year teach you that you still use today?
Oh my gosh, it was amazing. So, I had one interview at this investment bank in San Francisco called Robertson Stephens & Company, which was the kind of the leading technology investment bank in that we My interview we talked about college for 20 minutes, then the guy said you can start Monday. And I said I don't know anything. And he said go buy this book, and he wrote down a random walk down Wall Street, and I read it over the weekend. So, the first thing I learned was about indexing and efficient markets. I'm sure some of your listeners know that book. It's pretty famous because when it was first written in 1973 it the author laid out his idea, which was an index fund. So, that book's all about efficient markets, but I quickly realized that I'm an Omaha person and an active person, you know, generally speaking. When I say Omaha person, a you know, Warren Buffett Charlie Munger wannabe, but it was What was great about it was the I worked in the mutual fund group, which they had had a lot of success with this emerging grow emerging growth fund, which was focused on technology investing and you know, mobile phones were the latest rage and biotech. and so I just got thrown into this growth investing. And then the second fund they launched was a value fund. So the opposite and I was like an investment gym rat at this point and I So I kind of gravitated towards the value. And then the third fund was a contrarian fund when they said the sky is falling and you should buy nickel and you know, trees and stuff like that. So I my first year was great cuz I got to see a whole lot of different angles and you know, different approaches to investing.
That's so fascinating. That's so interesting as well. I guess E*TRADE investing put fractional shares in front of ordinary investors before anyone wanted them. I guess what did people say at that time?
Well, you know, at the time I had you know, the internet had just arrived in 1995 and again, I just happened to be lucky. I was young and living in San Francisco and working in the tech, you know, investment banking and I had kind of burned out. I took a year off and I traveled around the world my wife and you know, I doodled in my little notebook and I thought about investing and you know, ultimately when it comes to investing, if you know, you're starting off investing, you know, how do you do it? If you I don't think anyone said first principles back then, but I guess I'm sort of a first principles person and when I broke it all down, I thought, okay, what how does this work? For the first thing you want to do is make more money than you spend. Right? And then you want to save it. Okay? So let's say you're starting out and you're in your 20s and maybe you could save $500 a month. Right? Or a thousand or three hundred, whatever it was. So okay, I'm doing that. Now what do I do? Well, then you invest it. in what? Well, you can invest in a lot of things, but the stock market's one of the you know, the area I just happened to work in. And so okay, I want to invest in stocks. How do I get my $500? Now I invest in stocks. How do I do that? Well, you can't back then you had to buy 100 shares of a stock and the cheapest commission to do that was $30 basically. And so and the average stock was $30 a share. So if you wanted to buy stocks directly, you needed $3,000 to make one trade. And some stocks were $100 a share and you could buy one or two shares, but then the commission was $59 an odd lot fee. So I just thought about it like well what why can't we have fractional shares and now that this internet thing we could pool multiple orders and we'd have to keep a little inventory and so it was an idea. I just thought it would in a perfect world you'd be able to buy $5 of Coca-Cola or $10 of Starbucks, right? Or you know, you'd make the Sunny Ray 10 portfolio and put $20 a month into these 10 What you know, you just made the market a lot more easier for the average person to invest in because before that you had to buy a mutual fund, right? If you had $530 to invest you had to use a mutual fund and the and I had become you know, I'd been an analyst and mutual funds were my clients. I made a lot of money as a you know, 26-year-old and 7-year-old selling investment ideas to hedge funds and mutual funds, but when I did the math on it, I realized that you know, the traditional active mutual funds were like a giant tax on the investors, right? You got 1 and 1/2% in fees and then there's all these other commissions that they pay with your money and things like that. So in fact, we called it build your own fund. The company was electronic investing corporation or e-investing, but build your own fund was the name of the product and as I think you know, we ended up selling it to E*TRADE in the year 2000.
You built direct indexing in 2002, right? And then coined tax alpha. Why did the industry take 20 years to catch up?
Well, it we called it active indexing back then. Nobody called it direct indexing until a few years ago, but and that idea was basically like to build your own. Now that you have fractional shares, let's build your own index fund, right? And you probably wouldn't use all 500 stocks, but you could use 50 or 100 and then, you know, be then if you were a taxable investor, you could just do loss harvesting and, you know, you could beat the index after tax. That was the idea. As with as I've learned that anytime you have a new idea, most people are going to poo-poo it. They're going to say, "Oh, why do you need that? That's a high-cost index fund. That, you know, nobody needs that." But, some people saw the value in it pretty early. and as I we talked about, there was a number of people at Google that ended up as clients cuz they understood math better than anybody and to them it was like, you this is clearly the best way to invest, right? if, you know, the most likely way to beat the market. And so, it was very slow at first. You know, there's a lot of inertia. New concepts are sometimes break the system. And, you know, for example, if most of the direct indexing that happens, I mean, it happens at places like Wealthfront now, but it's still mainly, you know, happens at Morgan Stanley and, you know, wealth managers. And back then, if you went to a wealth, you know, Morgan Stanley and said, "I have an I have a this active investment strategy, but it's indexing." They would say, "Well, no, are you a growth manager or value manager?" So, it they would like that doesn't compute, right? You What do you mean you're an index separately managed account? So, the system's caught up, but the marketplace realized that, you know, the largest allocation for most investors is going to be US large-cap equities and, you know, paying a percent and a half to a guy that's may not keep with the market was even risky for the advisors, right? If you could just guarantee you're going to get the market return and some customization and tax off, it's fine. I think it's well over a trillion dollars now doing it.
Wow. The standard emerging markets indexes banks, energy, and telecom. So, when did you realize that wasn't the actual economy?
Well, the first day that I got into emerging markets. I was actually it started at Google. my long-time partner, the guy that wrote A Random Walk Down Wall Street, gave a talk about investing in China 20 years ago right when you know, we had sold our direct indexing business to a big Boston company. And Burton gave a talk and they said that we want to invest in China after his talk and I said, "Okay." And I went back to the office and I the first thing I did was I walked over to the portfolio managers and I said, "The Google guys want to invest in China. Give me a list of all the companies in the FXI, which is the ticker for the first ever China ETF." And be because I'm an Omaha person, I don't care what the name of your fund is, if it's an ETF or an active fund, I'm going to look at what are the holdings because I'm going to own a bunch of businesses, right? You know, it's the ETF is the wrapper, but what I'm owning are businesses. And so, I asked for the list of companies and that's when my partner Burt said, "Kevin, when you get the list, you're going to see that most of the Chinese companies are banks, government-owned banks, oil companies, government-owned commodity companies, and that and then he explained that you know, these state-owned enterprises, they didn't they were usually corrupt, they were always inefficient, and they didn't really care about growing their earnings. And you know, in Omaha, investing is really simple. The reason a company has value is it makes profits. The only way to grow the profits is to grow the value. The only way to grow the value is to grow the profits and I could I didn't even have to I hadn't even sat down in my seat yet, right? This is my first 30 seconds in emerging markets and I get the portfolio of the index and it's 80% government-owned banks, oil, mining, government-owned airlines and just by the way, if you pull up the chart for the FXI and go all the way back to the 20 years ago, China's economy grew 500% in that period. The returns of the FXI are like -50%. So, you know, you there's a been a lot of growth in emerging markets, but the companies that are represented in the indexes, you know, collectively really haven't kept up until the last 20 months where they I showed up.
Yeah. Hey Kev- Kevin, you call India the next China with the phones China didn't have. Like where does that comparison stop being useful?
Sure. I'm sorry. Where does it stop being useful?
Yeah, where does that comparison I guess between China and India break down?
Oh, yeah, sure. Well, so, in our EMQQ family of ETFs, we have a fund INQQ which invests in the Indian internet sector and so the story, you know, before AI got here, the real growth story in emerging markets was a first the consumer. You got 6 and 1/2 billion consumers and they're getting their first ever computer or smartphone, right? That gets better and cheaper every year. And then when they get that, they get the internet. And so the e-commerce story has been the story in the last, you know, 20 years. That's where the growth has been before AI got here. And it's still got a lot of growth in e-commerce. But so, China 20 years ago s- India and China that day 20 years ago were basically the same size. I mean, the China was a little bit bigger GDP-wise. but not much. But China with its one-party system was able to build this incredible infrastructure and develop the country. And India was just mired in bureaucracy and the power didn't even work and you know, it just couldn't ever get in gear. But India has digitized. they have a digital ID system that is now 98% of the population can open a bank account with their eyes and fingers with biometric information which India in the last 10 years has opened 800 million digital bank accounts with no paperwork. And it's really amazing what they've done there. But India's like China 20 years ago. The biggest difference though is 20 years ago nobody in the world had a smartphone. China had 200 million PCs in the country. But there was no such thing as a smartphone. India is now at that same kind of inflection point. And the smartphone has gone from nothing, didn't exist, to now you can get brand new smartphones for under $20 in India. So that's one of the things that makes it different. Now India is working on their infrastructure. They're never going to catch up with China. China's got the world's best infrastructure by a mile. including you know, an incredible high-speed rail system. but India is a democracy. It's got that going for it. A lot of people are you know, this they find the Chinese government distasteful, but it doesn't you know, I it doesn't bother me because it's like they chose it. It's just what they got and.
I don't think it's the that it's evil.
Hey Kevin, what launching a new fund in 2022 teach you about who really shows up on day one?
Well, I launched my first fund 20 years ago. That it China real estate fund, but you never know who's going to show up when you launch a new fund. You know, I've had funds that had $100 million in the first day and I've had funds that you know, never got to $50 million. So, you don't really know. it's one of the you know, it I've always have an opinions about my fund or friends or other people that when they launch funds, I'll handicap whether they're going to work or not and my batting average isn't as high as I would think it would be after doing this for 20 years. So, you never really know. It I mean, what you really want to do is be first to market with a category that people care about and so the reason that you know, right now we're focused on the AI in China because it's you know, it's in the AI race if you will. I don't like to call it a race cuz there's no finish line, but the AI you know, situation, it's there's two countries involved. It's the United States and China and there's a hundred different ways to buy the United States AI companies, but China's AI companies are a little harder to reach and to research, but I fortunately had a pretty good head start on this and so, I think it's certainly sensible for people that are interested in investing in AI to at least have the China part covered as well because, you know, some people like Jensen Huang and Elon Musk have made comments that China may win the race if in fact, it is a race. So,.
Kevin, what are you pushing hardest on over the next 90 days?
I'd say AIC 8, which is again, that's new China strategy and it invests, you know, if you look at the what AI is, I mean, it's a five-layer stack. You have energy, chips, data centers, and that's the you know, the infrastructure of AI. The fourth layer, the models, right? That's what you know, open AI and Claude are.
Yep.
And then the top of the stack is applications. And now, we had power and chips and data centers before. The new layer is the AI layer are the models. And so, the first product we launched a couple of weeks ago is the China AI LLM Tigers. These are basically China's the ticker TGRZ. The China AI Tigers. These are the China's answer to OpenAI and Anthropic. And it's really the front line of AI is are these companies and this is playing out on a daily basis and it's not going to go away. The China models are getting better and better. They're as good as our frontier models, some of them. They're also a whole lot more affordable. They're open weight, so the China models can be downloaded and you know, customized and you can run them on your premises without running up a big token bill. And right now, just in the last few months, the China models are getting used more than the American models by American companies.
80% of the startups now are building on top of these China AI models and right now, the Tigers is a very narrow portfolio. There's only three holdings. And it's incredibly volatile and but you've got Deep Seek that's going to come public at some point in the next 6 months, I think. And then you're also probably be at for the end of the year, you're going to see Moonshot, which is the AI model from China beyond behind Kimi K3. So,.
Cool, Kevin. it's super exciting, man. We I got to bring you back to the show maybe in a couple weeks, but thank you so much. And a lot of people listening live, thank you all for tuning in. And Kevin, where do people learn more about the fund? We'll land the plane after that.
You can learn more about these new funds at emxetf.com. That's e as in emerging, m as in market, x etf.com. emxetf.
Awesome. hang up for 1 minute, Kevin. I'm going to bring this stream to an end. Thank you.
