Memory Is A Bubble, But Nvidia Protected – Jan Van Eck On Semis Surge

0:00Well, what I would say within the AI ecosystem, Wilfred, there are bubbles, to use a word, that probably don't like that much, right? I do think that the memory-specific pocket is a moment in time. You know, one hates to call a top when something is like this, but I personally am wary about the memory stocks because in the medium or long term, they don't have quite the competitive moat. I believe that Nvidia does. I think we're in what we call a crypto winter, and I don't think it's coming back. Like, I just don't think a lot of those projects and softwares will be at all interesting or alive in five or 10 years from now.

0:44So the concept of blockchain and stable coins are definitely there and Bitcoin is there. But a lot of other parts of the ecosystem are just, to me, going away. It's such a big company, SpaceX, that we're glad as ETF sponsors to have it in the public markets. As you said, the amount of money here is absolutely staggering. It's just staggering. You're talking about cumulatively hundreds of billions of dollars. It's just the waves of liquidity that are going to be sloshing through the economy, I think will, you know, they'll be positive short term for economic growth. And I think they will be absorbed.

1:29Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by Elseg, Interactive Brokers, the World Gold Council and BNY Investments. Please do remember the views expressed in this podcast are for general information purposes only. Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. My guest today is Jan van Ecke, the present CEO and owner of Van Ecke and its associated companies, leading the asset management firm, an ETF giant that was originally founded by his father in 1951.

2:20He has grown it to the Goliath that it is today, especially in the ETF industry with$225 billion of AUM. And he is a regular podcast participant, always sharing his opinions loud and clear, which we very much welcome here. Jan, welcome to the Master Investor Podcast. Wilfer, it's great to be here for the first time with you. And I wanted to just jump straight in to the kind of ETF that I think is, it's fair to say, has really driven a lot of your performance in recent years, but is right at the center of everything in markets right now. And that is the SMH, of course, focusing on the semis, which has had unbelievable performance of late.

3:07I think I'm right in saying it's now$65 billion in AUM. Is that right? Something like that. Yeah. And obviously is now the go-to place for people that want exposure to the area. Year-to-day, it's up 58%. Over 12 months, it's up 135%. Almost more impressive than that. Since inception, it's up 29 % per annum. That's crazy, right? Unbelievable. That's really hard to do on a compounding basis. You should retire right now. Yeah, exactly. Tap out now, but I'm sure you won't, and that's why you're showing up for this podcast. But in the last year or so, how much of that is price performance versus inflows to get it to 65 billion?

3:53Oh, a lot is price performance. I mean, I can't imagine that more than 10 or 20 % in the last 12 months has been inflows. That's interesting. I would have thought there was at least a significant more of inflows than that. And what do you think has been driving it? I mean, maybe it's a simple question, but is it the AI theme, pure and simple? Yeah. I mean, listen, I think the VanEck investment philosophy is to try to take a big picture macro view. I call it 10-year macro. And what I mean by that is in 10 years looking back in 2036, we were going to look back and say, what are the very biggest themes affecting the world and therefore financial markets.

4:38And that hopefully filters out a lot of noise. But I think what we're left with is three things, at least AI, the rise of India, and then the over borrowing by the US, your country, the UK and Japan leading the way, I would say. So yeah, from the AI perspective, it's pretty simple. We have demand for compute up here. for this wonderfully efficient new technology and supply here. And so everything is, and the semiconductor is at the heart of that, obviously. I drill down a little bit further towards NVIDIA. So one of the reasons our ETF has outperformed other semi-ETFs is that it only focuses on the top 25 stocks.

5:28And it allows the largest holding to rise to 20%. So it's really been riding the NVIDIA train. if you will. And NVIDIA itself is a whole separate podcast, right, of the incredible performance. So are we comfortable, I ask myself, with semiconductors today in NVIDIA? And I am. One never knows if a company can lose its competitive moats, but I think NVIDIA will definitely be one of the leaders 10 years from now, partially because it's the kind of mainframe of AI, if you will, not just a single chip manufacturer, GPU manufacturer like it used to be, which was not only cyclical, but also highly competitive.

6:13And so, you know, I think NVIDIA with its software and its cost advantages that it has, not only in the scale of production, but also because it produces more efficient chips per dollar of electricity or pound, then I think with forward earnings only kind of in the low 20s. So all of those things, even though NVIDIA hasn't been the hottest stock in SMH, our semiconductor ETF over the last nine months, I think it's a very solid piece of your portfolio. Sorry for the long answer. No, no, I love it. And I mean, NVIDIA, I was looking at your most recent And disclosure on this, I think, is that 17 % of it at the moment.

6:57TSMC is next at 9%. And I want to sort of dive into those in a second and totally acknowledge your leading point there, that you get that significant exposure to NVIDIA and others. But it is interesting in the last, certainly this year, but as I think you just said, nine months, that it's not been driven by the likes of NVIDIA. We always talk about whether an industry is going to be winner takes all or winner takes most. And for a large part of the last few years, I think it's fair to say that a lot of the semis were kind of left behind by the AI theme until recently. Absolutely. I mean, the methodology of RETF and, you know, some of it was thought and some of it was luck, Wilfred.

7:42But when you only pick the top 25 names, what's ended up happening, at least in this era of investing, I'll call it the last 15 or 20 years, is that large caps have really led the way. So by only having 25, there were probably, well, there definitely are well over 100 semiconductor companies. By filtering out the bottom ones that were in more competitive spaces, you eliminated that drag, if you will. Now, that's not always true for all periods of time in investing. But over this period of time, it's really leveraged into these bigger winners. In the short term, though, year to date up 58 percent.

8:27Clearly, it's broadened out enormously. The memory stocks have been on a tear. Can that be sustained? Well, I doubt the performance. I mean, we've just had historic performance in the month of May, so I doubt that's going to continue. But I don't think, see, again, this is where I get to this kind of super macro view. If demand is up here and supply is here, then we're not in an irrationally priced market. because the capital markets are telling entrepreneurs, you know, come here, we need your capital, right? We are valuing your capital because we need to build out AI compute centers. And that's just not surprising.

9:16I think the reason that our way of looking at the markets with this 10-year view works is because humans have this bias towards looking backwards. And when big trends happen, whether it's the rise of a country or the rise of a major technology, we just can't look backwards the last prior quarters of company earnings or a prior use of technology to really understand the scale of the build out. Now, that's not always true. There are a lot of fake fads and technologies, right, that don't play out. But, you know, this is one that clearly is grabbing all global markets, you know, by the throat and shaking them up.

10:03In terms of just sort of one final short-term question on this, you know, you look at the KOSPI, the Korean index, another all-time high today. It's tripled in the last 18 months, which is just extraordinary for a national index. And it's been driven really by Samsung and SK Hynix. The index itself was up 12 % one day last week. Does that make you worry about the opposite, about what we saw, say, in late 2021, before we saw a big pullback in 2022 when you had sort of meme stocks going through the roof. I know all of these memory stocks, those two in particular, have seen extraordinary EPS upgrades.

10:46It's very different from a sort of meme stock type frenzy. But are there some similarities that Flash read to you? Well, what I would say within the AI ecosystem, Wilfred, there are bubbles, to use a word, that probably don't like that much, right? So going back to the end of last year, the question was, you know, what was the financial sustainability of the open AI ecosystem, right? Open AI, as Chad, it's one of the leading model companies, was clawed, going to leapfrog it. And so the companies in the open AI ecosystem, I call it. I mean, that's obviously only a very loose description. Oracle that had leveraged into building compute for them and CoreWeave were both down 50%.

11:37So even within this sort of broader trend, you will find pockets. That was a company-specific pocket. To your question, I do think that the memory-specific pocket is a moment in time. You know, one hates to call a top when something is like this. But I personally am wary about the memory stocks because in the medium or long term, they don't have quite the competitive moat, I believe, that NVIDIA does. And so I think entrants will come into that memory. There's no doubt there's a shortage right now. And that's giving them pricing power. Most of the reason that their profits are exploding is not because they're selling a lot more.

12:20They have limitations. It's because they have increased their prices. And, you know, that means that other companies that use that memory are going to be looking to economize on the use of it. So I'm with you. It feels bubblicious. And so it's not something that we're reducing our exposure in the memory space for our actively managed funds. And video is 17%, I think, of the SMH, the next biggest TSMC, then followed by a lot of those big US names, Intel, Broadcom, AMD, Micron, Texas, Qualcomm, they're all six or 7%. Does TSMC have a similarly defensible mode as Nvidia, slightly different, but similarly defensible?

13:04I mean, yeah, it seems not only do they have the manufacturing capability, but they also have the capital, right, to build these very, very expensive, you know, sort of manufacturing, chip manufacturing facilities. I would guess that, you know, one of the advantages that NVIDIA has and TSMC is because they are working with broad swaths of the ecosystem, you know, kind of basically everybody, they are seeing where the technology is going in terms of customer needs. And so I think most people would say that TSMC will be, they'll be there in 10 years. They'll be a survivor.

13:50This episode is brought to you by LSEG, the leading global financial markets, infrastructure, data and analytics provider. To learn more about how LSEG connects businesses, investors and markets worldwide, visit lseg.com. This episode of the Master Investor Podcast with Wilfrid Frost is sponsored by BMY Investments, a trusted partner for many delivering financial solutions to investors and institutions worldwide. This sponsorship does not constitute financial advice.

14:31You mentioned already that the likes of Oracle or CoreWeave pulled back significantly from a late October last year high down to the sort of March Iran war low, Oracle halving, which is pretty significant given its size. And I heard you on other podcasts saying, therefore, you don't need to worry about the AI bubble overall because it kind of already burst. How do you get conviction to reload on the right names in those moments, particularly given that such a big portion of what we're talking about isn't listed yet? So you're kind of playing by proxy throughout that process. Yeah, this is going to sound very much like we're an ETF sponsor, but a diversified approach is definitely the way to go from a company perspective.

15:25You know, timing wise, when you're in the middle of a trend like this, you'd rather buy during a pull off, pull back rather than leap in right now. Right. And that's we talked, you know, several minutes ago about the flows into SMH. And I think a lot of the assets of the fund are people that have bought, you know, many years ago and are just letting the appreciation work. And, you know, I think that's that that that's healthy in a way. Right. That there's not a lot of quick money chasing it. Now, there is money chasing the memory stocks, and they will chase the hot dots in the ecosystem, to your point before.

16:11But I think overall, we're still overweight semiconductors in our broad portfolio models, but we're itching to take a little profits here. Let's talk more broadly now about VanEck, about the business. I had to dive in on the SMH initially, but I hadn't realized this, I must admit, before prepping. that while the firm was founded in the 1950s, it only really got into the ETF game in the early 2000s. 2006, right? We're 20 years into the ETFs. Yeah. I hadn't realized that it's now obviously the biggest portion of your business. Right. Yeah. Oh, by far. I mean, it's over, I think, 95 % of assets, even though we do have an active business.

17:01It's specialized in gold mining resources and emerging markets, but it's important to us. I sit with our active portfolio managers. It's interesting because we had Jeremy Grantham on recently and refer listeners back to that episode. He was one of the very first proponents of ETFs. He talked very warmly about the impact Jack Bogle of Vanguard had had on the industry and the wonderful mission that he had to reward his employees if they managed to lower the costs for customers and that that was a kind of new thing when Vanguard were driving that 50 or so years ago. Is that a core theme for you as you've driven this ETF business?

17:50Is ultimately if you deliver for the customer and lower costs that it will ultimately long-term pay for you? It's a scale game, for sure. You know, I think that especially in the privates area and hedge funds, active management can be a diseconomies of scale game. What I mean by that is if you just have too much money, you know, you can't run an early stage venture fund or, you know, a small cap fund, right? They have to. They are what people call capacity constrained. You just can't manage too much money on it. ETFs are the opposite. They're a scale game. So the more AUM, the more you can service a broader swath of clients.

18:35And then, you know, we don't compete with Vanguard in the, you know, core of people's portfolios. But for the specialty areas where we do compete, we try to have our fees be very, you know, very competitive. Well, for the last thing I would say, and that's the reason I do podcasts like this, and I was bearish on memory here, is that in the private area, the active side of the business where a money manager can align with investors or clients is to co-invest. We have so many niche ETFs that we don't want to own all at the same time. So the way we try to align with our customers is by using our research and sharing our research, what we like and what we don't like at any moment in time.

19:27So, you know, that's why we do these quarterly outlooks. Sometimes we're bullish about a lot of things and sometimes we're not. And in terms of, you know, you mentioned the word active already, and I guess this therefore might be stating the obvious a little bit with VanEck ETFs, but a lot of people think of ETFs as passive. And you either do passive ETF investing, or you give your money to a money manager who does your classic active portfolio construction stock by stock. How quickly can you pull together a new ETF, for example, a new theme, or just around the ETFs that you already have? And do you define yourselves as active ETFs definitively?

20:14Well, I think there's two ways in terms of active decision making around ETFs. So one is, which ETFs do you own? And if you have specialized ETFs like VanEck generally does, we have some broader ones. But do you own semiconductors or not? I mean, these types of, even though the tool may be passive in ETF, but the decision how to weight them and how to time those investments is very active. And in VanEck's view, almost like the most important decision, because the way we look at the world is asset allocation selection is really, really important to investors. And, you know, our history, we started the first gold fund in the United States.

20:59And, you know, we think gold is a very powerful diversifier in your portfolio at various points in time. I'm not as always gung-ho as my father was. But so that's an active decision. Then the second piece is, does it make sense to have an actively managed ETF? And I think that's bigger in the United States now than it is in Europe. But we do have selected actively managed ETFs. One, I'll give you two examples of flavors. One is a stock picking or investment picking that targets, I'll call it the crypto industry or digital assets. And we launched an Ethereum ETF and I sort of started talking to clients.

21:42I realized no one had any idea what Ethereum was and why it would perform or what the risks were. And, you know, our job as a money manager is to try to describe opportunities, but also risks. So I said, OK, let's pivot and offer an actively managed fund in that area so that you don't have to follow the vagaries of Ethereum or a particular Bitcoin miner or another payments fintech like Revolut. Let us follow the industry and shift things around actively. So that's like an active stock selection ETF. And then we actually have an actively managed asset allocation ETF for your real assets or commodities exposure in your portfolio.

22:27So if you don't want to choose between gold and oil or between oil and oil stocks, then we have that type of actively managed ETF. And what are the tickets for each of those two? Node, N-O-D-E, is the stock picking digital assets ETF. And my colleague, Matt Siegel, is very active on Twitter. If you want to spend some time reading his daily comments on stocks in his universe. And then Rax, R-A-A-X, is the real assets allocation ETF. And to stay the obvious to listeners, obviously, Jan has an interest in those ETFs and nothing on this podcast constitutes direct financial advice. And just to round off this kind of ETF industry section of the conversation, Jan, I'm interested where you stand on the risk to the overall market that has come with the growing concentration that ETFs has led to.

23:27Again, it's much more the big S &P 500 ETFs type thing that has led to this, not so much the active ETFs that you're talking about. But when you see the bears use that as one of the big fears they have, do you think there's legitimacy to that point? Wow. You know, we probably don't have time to talk about all the market structure impacts. But I would say, let me tell you two areas that I'm particularly worried about. It's more in the fixed income area. Number one, just illiquidity of fixed income, right? If we have a bond ETF, only 5 % or 10 % of those bonds in that portfolio will trade on any given day.

24:09So that means that there has to be people behind the scenes, brokers, making markets in those bonds. And during market crises, people tend to reduce their risk. and therefore those bond ETFs can trade less efficiently. Some might say more accurately. I would probably say more accurately, but still they will trade at wider spreads, meaning more expensive to buy and sell, and they'll probably fall in price. The second thing has nothing to do with the ETF industry, but my biggest concern about financial markets, as I mentioned before, is the spending by some of the governments and the developed markets.

24:55But sticking with the ETFs, I'd worry the most about fixed income. Hi, guys, it's Wilf. I hope you're enjoying this episode. Just a quick reminder to please hit follow or subscribe on your podcast or video app so that you never miss an episode. And if you've got time, please do give us a five star rating and leave us a comment. It really helps other people find the podcast too. Now, back to the episode. In the last week or so, I mean, today, the start of this week aside, we did see bond yields pick up quite meaningfully, the sort of US 10-year getting above 4.6%, having been relatively calm at 4.3 % for a while.

25:36When you see moves like that, does it remind you of that big fear that you have, that big macro fear? Well, Wilfred, as you'd guess from my kind of 10-year macro philosophy. I love charts that are multi-decade charts. I always say anything less than 10 years is a chart crime, if you have the data, obviously. But if not, try to find an analogy that has a longer history. And 30-year bonds for Britain and Japan were hitting multi-decade highs last year, And that march has continued this year, I think, for slightly different reasons in each country. Right. You have a little bit of political turmoil maybe at the top or less less certainty maybe than we have.

26:26So, yeah, I think that that's, you know, and government bond markets are some of the weirdest, most inefficient markets in the world. you know, from my perspective, because they tend to lock into a certain mindset and really become disconnected from reality. If you remember before the European financial crisis or whatever that was, you know, where Spanish and Greek bonds had lower interest rates than German bonds. I mean, that never made any sense. And, you know, and then suddenly, boom, you know, they became, repriced dramatically. So I guess I would say what's interesting to me and telling is that bond investors are requiring higher long-term yields for the UK and for Japan.

27:21I'm very nervous about the US, but timing is everything in life. And so I do watch the 10-year, Wilfred, and I'm like the most, I tend to worry the most about it, but I also know that we're in this era where other people aren't worried about it. And so we didn't break out really to kind of longer term, multi-decade highs. And the U.S. 10-year is still in the trading range, but it's something I really watch very closely. And just to contextualize that, the U.S. budget deficit sort of peaked at 6.5 % two years ago. And because of Trump's tariff revenue had been declining, and I'd predicted sort of a lower 5 % budget deficit this year, which is still very high.

28:12It should be no more than 3%. But it was headed the right way. If the U.S. is spending half a trillion dollars on this Iran war, that would suddenly catapult us to, again, 6.5 % or 6.9%, my math, budget deficit. And I just can't see markets not worrying about that. I mean, it's really interesting because I think in the last two weeks, we've also seen the very strong correlation we're going to see. Even if it was the UK that was the trigger the last two weeks or Japan, everyone kind of moved in sympathy because of these bad debt dynamics, which I do think is interesting, even if the US isn't in quite as perilous a position as the UK or Japan, it kind of is likely to move in sympathy.

28:58If we do see the 10-year or 30-year keep rising in yield in the US, do you think there is a direct negative correlation with something like the SMH, even though the SMH is playing into a theme in the long term that you believe in. Do you think P multiples will be depressed, even in those growth areas? 100%. I don't think, and I haven't actually, and I look forward to talking with my clients and others about what would happen if there really was a loss of confidence in the US government's ability to meet its obligations. And I don't I don't know if there'd be anywhere to hide. You know, Wilfred, I say that, well, gold is a good medium or long-term hedge.

29:45But I think if everyone were running away from the financial markets, probably gold would sell off as well. So I don't see how semis would be immune from that. To a certain extent, you could say, well, the tech sector isn't that debt dependent. And so there shouldn't be the direct link. But, you know, I think when everyone's running for the exits, I don't think that anyone would be able to run in the other direction. Let's talk about the opportunities then. If we do head to a more inflationary decade, which I guess is a big part of why we've seen yields move higher. Gold, do you think, would see some selling in the short term but is attractive in the medium to long term?

30:33And tell me a little bit about the GDX ETF, the gold miners ETF, which obviously you guys run and has been hugely successful. At just the current level of price, even if gold doesn't move, are those miners all making good profits? Oh, yeah, they're gushing cash. Yeah, they finally have escaped. They were really in purgatory for the last 15 years. First of all, gold wasn't high. august institutions like the Bank of England, sorry, I can't avoid this, sold gold at about $250 an ounce, by the way. Late 1990s. Thanks, Gordon Brown. Yeah, there was just this era that gold was not an important part of people's portfolios.