Kevin Carter, EMQQ

And when it was first written, there were no index funds. And the author, Princeton economist Bert Malkiel, basically in three paragraphs laid out his idea for a new type of fund, which was an index fund that owned everything and didn't trade and had low fees. And he suggested the New York Stock Exchange make this index fund, but they did not do it. And his friend, John Bogle, did and started Vanguard. So I started by reading about indexing and efficient markets. But I quickly, became an Omaha person when it comes to thinking about investing. And what happened was in 1999, I had my own idea for a better way brokerage.

So you could buy $5 of a stock or $10 of a stock. And I developed a system, filed a patent on it and built a company called e-investing, which we sold to E-Trade in the year 2000. But I asked Dr. Bert Malkiel, the author of a random walk to be an advisor to that company. And so that's when I first started working with Bert. So I've had sort of one foot in the active world and one foot in the indexing world for about 25 years now. And after we sold that to E-Trade, we invented another idea, which has gone very much mainstream called direct indexing. We actually called it active indexing when we started our company, Active Index Advisors.

And this is, making your own custom S&P 500 strategy where you own the stocks, directly, and can customize and loss harvest and so forth. But what happened was we sold that company, Active Index Advisors, to Natixis Asset Management at the very end of 2004. But just before that, Google went public. And when they did that, they asked my partner, Bert, to give a talk to the employees about investing. And I wasn't invited. But a few months later, a person from Google called me and said they wanted to, invest with us. And so I agreed to sort of as a side job be an advisor to this individual. And then he started introducing me to other individuals at Google.

So in 2005, I was going to Google pretty much every week. But my partner, Bert, started going to China. And he wrote a book about investing in China. And Google called me and said, hey, can Bert and come talk about China? And I said, sure. And 20 years ago, I picked him up at the airport and drove to Mountain View. He gave a talk about China. And then all these people at Google looked at me and said they wanted to invest in China. So I didn't plan this. But for the last, 20 years, my entire focus has been on emerging markets and not just China, but India and the rest of emerging markets. And, what I learned pretty early was that the thing that's actually emerging

In emerging markets are six and a half billion people. And they want all the things we've got. They want more food, better clothing. They want air conditioners and heaters. They want to go to movies, take a vacation, get an automobile and have their kids go to Harvard. So I've been focused on that the whole time, what McKinsey calls the biggest growth opportunity ever. But about 11 years ago, again, the consumer companies was my focus, food companies, clothing companies, et cetera. But then all of a sudden the smartphone showed up and changed the way people consumed. And so that was really the inspiration for my founding EMQQ, which is our broad emerging market strategy.

And then in the first, seven or eight years of this business, most of the story was China's growth and the Alibaba and Tencent and the other Chinese companies. But we launched INQQ about three years ago when the Indian internet companies finally started to go public. So INQQ, we've been waiting for India for a long time, but now India is here and it's happening and it's still very, very early. And we expect the same thing to happen in India that's happened in China and happened in the U.S., which is the FAANG stocks, if you will, take over the world and the stock market.

And an hour in the afternoon. That's my, my principal non-work activity that I can, that I could list. Yeah.

Over three years ago. And, and so FMQQ is the same thing as EMQQ, but it just does, it leaves out China. Now, obviously there's a lot of investors that don't want China exposure for any number of reasons, but, um, uh, uh, it's also just a different story because, because the, the, the e-commerce story in Brazil and, and Mexico and India, it's just, it's just getting started. Whereas China's e-commerce market is now, uh, the largest in the world by a lot. So, uh, EMQQ is the whole universe, leave out China and you have FMQQ and INQQ is just the India part. So it's just one universe, one big story, but you can break it out into a couple of different pieces. If you want FMQQ leaves out China, as I said, and then if you just want, uh, India alone,

Uh, which I think is not, that's, I think a pretty sensible thing for a lot of investors.

A lot younger, um, than the developed countries. Um, they have faster growth, uh, and that's driving a boom in consumption, which again, that is the thing that's emerging. And if that's the list of why you're investing in emerging markets, it's not really a question. India is definitely perfect, or at least it's as good as you can get because it not only has a large population, it has the largest population in the world. It passed China, uh, two years ago and China's demographics are now more like a European country. So it, it isn't growing. Uh, India's population is growing and every day, India sets a record as the largest population ever. Tomorrow it'll set a record the day after that it'll set a record because it has a huge, uh, number of, uh, births every year still. So it's a

Growing population. And if you leave out China, India is bigger than every other emerging market combined. So, number two would be Indonesia. So it's the biggest by far, and it can't really, there really won't be another country with this population in any of our lifetimes. Um, it has incredible demographics. It has the dependency ratio of young people to old people, uh, is about the best in the world. It has, uh, uh, about 750 million people under the age of 30. So twice as many people, uh, twice as many young people as we have a population. So it's the biggest ever, the youngest ever. It has the fastest growing GDP at about six and a half percent. Um, and that's driving consumption just like we saw in China in the last, uh, 20, uh, years. Now this is happening

In India. So on paper, India is perfect. Biggest ever, uh, youngest, fastest growing, and if you look at the, all of these things, uh, combined and, and project out to the future as, a lot of economists have done, it looks like India will have the biggest consumption market. So on paper, India is as good as you're ever going to get, uh, if you're an emerging market investor. Now, what also makes, uh, I think India uniquely, um, appealing is that it's also the world's largest democracy and the leader of that democracy, uh, prime minister Modi, uh, has really, I think in many ways, uh, can take credit for getting India to where it is today because in his first 10 years, he's, Modi has served two five-year terms so far. He's just started a third

Five-year term, but in his first 10 years, uh, he's run the country like a business. India, uh, without going into all of his history, it's only been a free country for about 75 years, an independent country after the British left. And, and they had a whole lot, and they still have a lot of bureaucracy and socialism. And what Modi has done in the first 10 years is take out a machete and try to chop all the red tape and, and make it easier to do business, to start businesses, to close businesses. And just as importantly, he's also doubled the country's physical infrastructure.

One of the problems India has had for so long was the roads were terrible. Uh, the, uh, infrastructure was, dilapidated in many ways. The power didn't even work consistently. So there was brownouts at the factories. And so it wasn't really, the foundation wasn't very good for, for the country to grow. But in his first 10 years, he basically doubled the physical infrastructure of India and they're not anywhere near done. They have a $1.2 trillion master plan. And, uh, so they were finally, getting the power to work, efficiently. And I just, in November spent, um, the month in India and you gotta see it to believe it. I've been to a lot of emerging markets. I've seen a lot of infrastructure. I started going to China

20 years ago when they were in the middle of this, but, uh, the, the scale of this, the number of projects, it's just mind blowing. And it's, visually, uh, hard to capture in pictures or words. Um, you really have to see it to believe it. But, uh, the city of, of Mumbai or Bombay, uh, is, is absolutely amazing. What's happening, uh, in that city and all of the other major cities as this infrastructure work, uh, goes on. And one of the things that was, encouraging, as you'd expect is just in the, 12 months since my last trip to India before, uh, a lot of these projects are now online. So we benefited and saved, 30 minutes, uh, every time we drove from one part of Mumbai to another because of some of the, uh, projects

That have opened. So, so the reason India is happening now is because of, uh, this, uh, leader Modi, I think in many ways gets the credit for that. But then on top of all of these great things, you have two more things that really just set India above and beyond anything else in emerging markets. Again, leaving out China, China's, got a lot of great things, uh, as well, but it also has, different issues that people are well aware of. Um, but here's what, uh, makes India just even more compelling. India has the best human capital on the planet. If you look at India's, um, technology sector, first of all, it's older than I am. Uh, Tata Computer Systems was formed in 1968, the year before I was, uh, and so you have these large publicly traded

Tech companies, Infosys, uh, for example, that have created billionaire founders. And this is, again, this is, these are 40, 50 year old companies, new startups. They've been around for a long time. They're publicly traded. They've employed, hundreds of thousands of, uh, technologists and management talent. Again, kind of a low tech, tech 1.0, um, but a tech sector nonetheless. And you're not going to find a 50 year old tech sector in, Vietnam or Indonesia, et cetera. Um, you also have an educational system at the top that produces world-class talent. And I'm talking about the, the Indian institutes of technology and the Indian institutes of management, uh, over 20 of each of those. And, and they produce some of the world's best leaders and you don't have to look very far. Uh, the CEOs of Google

And Microsoft both, uh, came from those institutions. There's 25 S&P 500 companies that have Indian CEOs. So, again, this is very important. You can have all this, scale and youth and things on paper, but you need people to execute. And, and what is happening right now, which is very important is, historically the best talent did want to come and work in Silicon Valley, work for Microsoft or work for Google. Um, and if they didn't come to the U S a lot of them just wanted to get a job working for the government, be part of the bureaucracy because it was a safe and steady thing. But just in the last seven years, entrepreneurship has exploded in India. The number of startups seven years ago was 500.

The number today, 120,000. So you had, uh, just an incredible explosion of, uh, talent. Um, India has their own shark tank now, which is going into its, uh, fourth season. And, and what is also happening, another, one of my findings that I'm just crafting into my report from my trip is all of these things that India has are now spreading. So it's, the, the, the venture investors, many of whom I, uh, met with on my trip, including one of the sharks from shark tank, India, they all reported to me that the, now the best entrepreneurs they're finding are not from the IITs necessarily, but from second and third tier colleges and second and third tier cities. So, uh, uh, you've unleashed, uh, entrepreneurship anecdotally. We hear reports

About, uh, Indian talent in Silicon Valley that has, for the first time started to say, I'm going to go home, uh, to India and start a company. In fact, one of the, uh, more exciting companies we'll talk about here in a moment is called Zepto. Uh, and it was founded by two kids that dropped out of Stanford, not to go start a company here, but to go home and start this amazing, uh, unicorn Zepto. So, so you have unmatched human capital in India. And I can't stress enough how important that is. And then India has one other part of the story that nobody really knows. the, uh, making it black and white, obviously a lot of people know about it, but, but

From my experience, most investors, 99% of them, they have no idea about this next part, which is called the India stack. And it is, I think, uh, a cheat code, if you will, or a secret weapon that, that no other country has that, that really, uh, sets the country apart. Well, what is that stack or, well, let me, let me tell you what this stack is. To be totally honest, I knew about the stack for a lot longer than I knew what it was. So I started hearing about this India stack, I don't know, seven, eight, nine, 10 years ago, but only about three or four years ago that I roll up my sleeves and figure out what was the India stack. So let me, let me try to make it

Simple. Um, the India stack is, uh, what, uh, they call India's homemade digital public infrastructure. Okay. So now digital public infrastructure sounds really boring. And probably one of the reasons I didn't dive into this deeper before was because it sounded like something that would put me to sleep quickly. But let me explain what digital public infrastructure is. It's, it's really not a mystery. We're using it right now. People use it every day. They just don't think about it as digital public infrastructure. The best example is the internet. It's digital, it's public, it's free. Anyone can use it. I don't get a bill from the internet company, uh, necessarily. Uh, and it's the infrastructure for the information age, it's not the telephone lines and the pipes, but it's like the

Pipes for, uh, for the information age. Another good example of digital public infrastructure or, or DPI, uh, is GPS. No, no, you didn't launch any satellites and I didn't launch any satellites and I don't even know who did, but all I know is if I push a button on my phone, uh, a person will come pick me up and bring me to the airport. I don't even have to tell them where I'm going. So we have digital public infrastructure. We use it all the time. It's obviously very valuable. Um, India has the internet and GPS, but it also has some of its own digital public infrastructure, which, uh, is called the stack because if you made a picture of it, it's like a, it's a layer of different

Technology platforms that the Indian government has built. Um, and it is genius. And so let me tell you about how it started and how it, uh, the, what these pieces are. The most important piece of this, the bottom of the stack, the foundation is called foundation. It's actually called Adar, which is, uh, the Indian, uh, word for foundation. So the foundation of the stack is called Adar and it's a national, uh, identity card program. And it's a digital identity card program. And here's how this started. So one of India's biggest problems in getting into gear, into developing, um, was that nobody had identification. It was a kind of a free for all. Only about 40% of the people even had a birth certificate. So a lot of people didn't even know what their birthday was.

So this was a problem. They knew it was a problem. And in 2009, they finally decided they had to address the problem and they wanted to start a program that would give everybody in the country, um, a physical ID card, like a driver's license. If you want to visualize it and it would have their picture and their name and their information, but also give each person their own 12 digit number, like a social security number, a unique identification number. And so that was the idea. And they asked this guy, uh, this, not this guy, an important person, um, uh, Nenden Nelkani, who's one of the founders of Infosys, and he's currently chairman of the board of Infosys. They asked him if he would be in charge of this national identification card program.

He agreed to be in charge of it, but he insisted that if they were going to do it, they were going to use a lot of technology and that when people registered to get their physical card, they would also scan their fingers and their eyes so that the database would have biometric information that would allow anybody to be authenticated in a matter of seconds at almost no cost. Now this was all voluntary. Nobody was required to, to register and, and get a card and, and be in the database. They launched it in 2010. Now I knew about this program, but I didn't really pay attention to it because there just wasn't any Indian internet stocks to invest in. And, uh, so I, I added the logo of this program on R to my coming soon slide that I had, uh, for India,

But I didn't pay attention until again, a few years ago. And what, what I saw a few years ago, when I came back to see how this on R was, was going, I was blown away by what I, what I saw, what I, what I realized was 95% of India, 95% of the population, 1.4 billion people are now registered in this database. They've got a physical card, but they also can authenticate themselves with just their fingers and their eyes. And I, one thing I didn't know until a few years ago was that in 2014, they added some functionality to the, to the, um, uh, to the database.

And they put in a know your customer layer and they started a program with the banks. And they said, if you're registered in Audar, you can walk into a bank and open a digital bank account in a matter of two minutes with no paperwork. I don't remember hearing about that, but when I looked at the numbers a few years ago, I realized that not only is 95% of the population in the database, but about 800 million of them have gone into a bank and opened their first bank account. So you've taken almost a billion people, 800 million people whose entire lives were paper-based cash.

They didn't have any bank account. And you've taken them into financial inclusion on a, in a digital way in only a handful of years. So this was the first aha moment for the staff, the, the, using this system to digitize their financial system by, by bringing people again into a financial inclusion. If you will, this would have taken 60 or 70 years in the old world. They managed to do it in only seven. So now the entire stack, and I'll talk about a couple of the other layers, but all of these programs have open APIs, meaning that it's not just for the government to use, but private companies can use it just as Uber is built on GPS or, or, uh, door dash, is built on the internet and GPS.

You can build on top of these things. And the, the, the commercial aha moment for odd R was in 2016. And the 2016 really turned out to be the big bang year for the India digitization story. So in, in April of 2016, the, the database reached 1 billion people. It's now 1.4 billion, but in 2016, uh, April, they, they registered the 1 billion, uh, odd R and a week later, um, uh, or, or later that fall rather, um, geo, which is part of Reliance Industries launched the first 4g network in India. And at the time there was about 10 different mobile carriers, but all of them were on 2g and they were all in a vicious price war and none of them had any money to invest in 3g geo comes in and spends $25 billion to buy the

4g airwaves and build a brand new physical network covering all of India with state-of-the-art hardware ready for 5g and 6g. And when they launched, they had a pretty compelling offer and they had a big goal. They wanted to sign up a hundred million people in the first 12 months. Now that would have been impossible for one of the competitors, because if you went into one of the competitor stores, it took about, three hours to seven days to get a new phone, but the geo stores, um, uh, put in place a signup system that was on top of the odd R KYC, the know your customer layer. And they took that three hour signup time and made it five minutes and they managed to sell a million, uh, subscribers a day,

Uh, for many weeks. And they signed up a hundred million in about three months. So that was another aha moment. It wasn't just, the government and the banking system that could leverage this, but it was private companies could, could utilize this. So now, uh, uh, geo has 500 million subscribers, that all 5g available across the country. India has the lowest cost data in the world. So the Indian smartphone bill, if you pay a dollar, they pay two cents. The, uh, the price per gigabyte, uh, is, uh, uh, a fraction of what we pay here. Actually it's, uh, uh, yeah, about three cents, um, versus, we, we pay, we pay 30 times as much for our data as the Indian smartphone user. So you've

Used this staff, this identification layer to bring 800 million people into the banking system, 500 million people, not just, online, but 5g capabilities and the lowest cost data. You've done this in seven years. So, um, uh, that's the first layer of the stack. Now the second layer of the stack is a payments layer, the unified payments interface, which also launched in 2016. Now this was another program that got a lot of coverage in the media and I, couldn't, it was all over my, my feed, if you will. And I didn't understand the hype for this unified payments interface because it was basically QR code based payments, which wasn't really a cutting edge thing in China, everything had a QR code on it and same in Brazil already for

Payments. And so I thought, okay, well, I'll give you a small clap for launching QR code based payments, but I didn't appreciate the details. This isn't Apple pay, the unified payments interface, the UPI, the second layer of the stack. This is instant and free transfer of money from one account to another. I send you a thousand rupees. It's instantly in your account and it's a thousand rupees and you could send it to me again. We could send it to all of our friends a million times and it would still be 1000 rupees and it would move from one account to the next instantly. Now I didn't appreciate the details of that, but let me tell you what has happened since that launched and since 2016. So the UPI payments now have absolutely exploded. If you find a chart of this is the

Absolute hockey stick and it's still in many ways in its earliest, days. Right now, the UPI payments per month in India are 15 billion. That's about 50% of the entire world's instant payments. And it has the slope of the curve is 55% and it has not shown any sign of deterioration. Still only about 20 or 25% of the country is using it. And it has taken the entire economy in, seven years ago was 95% paper-based cash. 95% of the entire economy ran on paper currency.

Today, 80% of the economy is digital and you can't pay with cash. You can, but a lot of the storekeepers won't be happy if you try to do that. Some of them won't allow it. And behind this, the entire Indian economy has gotten formalized. You had a very gray economy, a lot of black money, gray money. Moni also in 2016 forced all the large denomination bills back in to the banks and took them out of circulation again to help formalize the economy. Now people are paying their taxes digitally. And so the tax collections are growing faster than the economy. So this digital foundation, this digital operating system that is the India stack, this is a secret weapon and it has added so much efficiency and, removed so much corruption from this financial system that it is

A real game changer. And there's no other country in the world that has this, not a developed country or an emerging market. And I've only scratched the surface. the foundation is the foundation and it, it's called that for a reason. It is the most important part of this India stack, but the payments layer is important. And there's other layers. There's a commerce layer. Importantly, there's a layer now that's going to allow for credit to grow of consumer credit and small business credit have been very hard to get in India historically. And that's going to change very quickly because now everybody has a digital track record. They can create their own credit score by sharing their, their digital financial track record with a lender. So the India stack really is

Incredibly powerful. And again, I've only touched on a little piece of this. They're applying this to health. They're applying it to cars and, and, the fast tags going through tolls. But I think people would be shocked if they realized how digital India has become in the last seven years because of the stack.

This thesis built, you got to put some holdings inside of the ETFs. Can you walk us through kind of the primary criteria for a company to be included in your index and in your ETF?

There's no box called the internet. So a lot of our work is, going through and, and, and uncovering which are the internet companies. So for example, we own a company called Paytm, which is the payments leader or one of the payments leaders in India. It's a financial services company. There's a lot of other, traditional financial service companies, but we don't want to own the, the Wells Fargo's of the world. We want to own, uh, the online version. So the, the first thing is to, to, identify which are the publicly traded Indian internet companies. So there's a little, uh, discretion involved in, in determining that. And as long as it is public and it is an Indian internet company and it meets our

Market cap and liquidity, uh, minimums that will include it. So we own, uh, everything that is in the sector as we define it. And, um, uh, other than it, and it's pretty straightforward from there. We rebalance twice a year. Um, it's market cap weighted with a, with an 8% limit on the largest, uh, holding. And, um, uh, and the list is growing. We, we have 30 holdings now. We, there's been, uh, a lot of IPOs in India this year. Again, four years ago, there was only two Indian internet companies. And then in 2021, there was a, a couple dozen IPOs. And there was also an Indian internet bubble, importantly, uh, that burst in November of 2021. Um, but, uh, after, and this has happened all over the world, uh,

After tightening things up, these companies got themselves profitable and, uh, uh, continued to grow. And, and so the, the companies, the, the, the stock returns have recovered from the, the big sell-off, uh, and, and with that recovery, uh, the IPO market reopened. So just, uh, a couple of weeks ago when we did our rebalance, we picked up five more, uh, Indian internet companies, um, which I'm, I'm excited about. Uh, one of them, Swiggy, uh, is part of this quick commerce thing that I mentioned to you earlier.

It's a fast evolving market. So we'll, we'll see how it plays out. But for right now, our main goal is to, give, give investors exposure to the sector that we are very confident we'll have the fastest growth and, and includes multiple companies that I believe will be multi baggers in the coming decades. Cause it, it really is in one of the other things that makes India so compelling right now is it's so early and there's a white space everywhere for these companies to grow. And you don't, for example, like online travel, we have, uh, uh, several companies now that are part of the online travel market in India, make my trip the largest one. And actually one of the two companies that we owned starting 10 years ago, that one went public a long time ago. It's

Also one of the only companies that trades in the United States. Most of the Indian internet companies only trade in India. And so there, it's almost impossible for us investors to buy the names directly make my trip trades on the Nasdaq. But, but when it comes to the travel sector, right now only 3% of Indians fly on airplanes on any regular basis, uh, only 3%. And so that number can double and it will still be early. It can triple and it will still be relatively early. So there's green fields in, in almost every direction, but that's, again, one of the, uh, area that's going to have a huge amount of growth because it, one of the first luxuries that an emerging

Market consumer splurges on is the $19 air ticket to go on their first flight ever. So again, more food, better clothing, appliances, go to a movie, get on an airplane. And so this travel market in India is exploding. Um, the, the, the largest airline Indigo, for example, um, uh, they have 1200 airplanes ordered. That's one and a half times the number of aerial airplanes that Southwest has. So they're waiting on one and a half times, uh, the size of Southwest fleet in new airplanes. Um, and so it's, it's just very, very early in, in all of these different verticals, uh, including, you know,