Adam Patti

So before we get started, why don't you take a little bit of time and tell everybody a little bit about your background and how you ended up founding VistaShares. Sure.

I've been in the ETF market dating back way back to around 2001, where I was running, among other things, a division over at Time Warner called Fortune Indexes, where we created a stock index based on the Fortune 500. And we used that index to create an ETF with State Street. The triple F was the ticker. That was way back in the early days of the ETF market. But that gave me the first taste of the market and the growth prospects and how interesting the ETF wrapper was for investors and how efficient it is to use in a portfolio. So fast forward, I ended up taking that knowledge and founding a company in 2006 called Index IQ. We were one of the early ETF issuers.

Yeah, no, it's great. And we're going to talk about AI today a little bit. But before we get into kind of geeking out on the ETF and AI, I always like to ask, what do you like to do for fun? Any hobbies?

You know what? It's an interesting question. I have three kids. One's going to college, one's in college, one's going into high school. So I'd like to say I have hobbies. But I think all my hobbies have been usurped by my three kids' constant demands for whatever they happen to be doing at the moment. That combined with a startup company is taking up all my time. But I used to like to work out and lift weights and play tennis. So hopefully I'll get back to that soon.

Yeah, right now you're just an unpaid Uber driver, I would assume. Exactly. So let's talk about the ETF you guys launched, which is AIS, the VistaShares Artificial Intelligence Supercycle ETF. So we're seeing a lot of thematic AI ETFs starting to be launched. So how does this differentiate itself from maybe some of the other AI-focused ETFs in the space? Sure.

Well, first, just talking about the supercycle concept, just to take a little bit of a step back. part of what DVX Ventures and John kind of came up with this brainstorming session early on to try to figure out how to create a better exposure to some of these disruptive trends. And what's interesting is that if you look at what a supercycle is, it's really a long-term disruptive trend founded in the technology revolution, right? So the last one was, of course, the internet. That was a single supercycle that, of course, changed the way we work, that we live our lives, communicate. But interestingly now, there's really four supercycles that are occurring at the same time.

So I was going to ask you about – you guys emphasize a lot this pure exposure to AI super cycles. Is that what you're referring to there, kind of investing more in the infrastructure? Can you kind of elaborate on what that means?

Sure. So to us, there are two important – so just to back up, what we do very simply is we look at the supply chain. So taking AI, what are the drivers of AI? Where is the investment going? What are the components that are required to build the AI infrastructure? And that's really a supply chain analysis exercise. So digging into the supply chain, understanding what each segment of it really means to the growth of the industry. Then looking at the bill of materials. So how much does it cost to build an AI data center? How much does it cost to build a high-performance AI chip?

So with such a focus on infrastructure, data centers, the semiconductors, rather than, as you kind of put it earlier, some of these AI applications, how do you see this focus maybe evolving over the years as AI adoption matures? we're still, we've moved fast, but we're still in the very early innings. So are you, is this ETF going to continue to kind of follow that bill of materials approach? Or can you kind of see your investment thesis evolving over time?

Well, the bill of materials is the core of it. So we do have, it is an active product and I can explain how we use our active management overlay to create value. But yes, we have the ability within our rules-based process to add additional supply chains. So certainly consumer applications will at some point be a significant piece of the business and maybe even the largest, but not today. Not without the infrastructure required to create those applications. So in the future, we will, probably be bringing out, adding to that supply chain focus and focusing more, bringing that consumer application piece into the, into the portfolio.

So you would mention, which I agree with you, a lot of these AI centered focused ETFs right now are heavily weighted. NVIDIA, Microsoft, you guys are much more diversified in terms of underlying holdings. I believe at last look and don't quote me on this. There's, some like 72 companies across various segments of the supply chain. So as you referred to kind of your active approach and rules-based approach, what are some of the key criteria for really selecting these companies and putting them in the portfolio? Sure.

So just, again, going back to the supply chain focus. So you break down the supply chain, you determine what percentage at each level of supply chain goes into building the end product. So on the data center side, call 25% is cooling systems. 2% is racking and cabling systems. So you really need to do that analysis, break down the supply chain, apply that bill of materials to see how important is that segment of supply chain into building the end product. Then finding those companies that are actually have the AI driven revenue within the segment. So, it's, it's, it's a time consuming process. It's heavy in analysis. And the way we've accomplished this is we've built this into a rules-based process that we filed a patent on.

So you alluded to this and this is right in your wheelhouse. So are you how are you weighting your holdings based on contributions to the AI sector in terms of, such as semiconductors or applications or infrastructure? Is that how you're kind of making a base weighting decision?

That's correct. So put aside the applications. That's not part of it right now. It's just the semiconductors in the data center. So, yeah. So we are first we are weighting them first by their contribution to the supply chain. So if it's a 25 percent weighting, if cooling systems are 25 percent of the data center, those companies in the in the cooling system bucket would get a 25 percent weighting. house benefit. Um, okay. And then what we're doing and then we're then we're looking a little deeper at the financials to determine how much revenue are they getting from, um, from AI projects. So let's say in the cooling system, there's $100 million in AI data center projects.

Yeah, that makes a ton of sense. And so that kind of core reweighting, is that on that semi-annual? Or are you a little bit more active, kind of maybe looking at quarterly results and reports to kind of tweak here and there as time goes on?

So we do an official rebalance of the core portfolio at the end of December, at the end of June. So that's part of the rules. But then we will certainly be looking at all of this on a weekly basis just to see how things are shaping up. we're not going to make active trades for the sake of being active. We're going to do it if we think there's a significant risk or opportunity that needs to be addressed.

So speaking about geographic exposure, does this go anywhere? Are you evaluating opportunities in emerging markets outside of the U.S. or is it pretty much just domestic?

No, we're looking globally. It's a global product. There's companies all over the world that are providing significant innovation into the space. About 60% of the portfolio is currently U.S.-based, though, followed by Taiwan and China, France, and so forth. So, there's market leaders in different parts of the world, and they need to be captured in the portfolio to get a good representation.

So I just want to get your take on this because I was reading one of your white papers, and it says in there, AI growth of up to 300x by 2032. what kind of key drivers do you think will fuel that growth? And what really, if any, risks do you see that could totally derail it?

Yeah, and frankly, that number might be off at this point. that was based on analysis from, probably six months ago. And you've probably seen all the news on all the CapEx investments being announced. it's absolutely an arms race right now. just a couple days ago, you just came and announced $200 billion. I think $150 of it was already announced, but they added another $50 to that. Amazon, all the Mag7 companies are, putting significant dollars in. So I think the CapEx numbers are even far in excess of what we anticipated just six months ago. And I think a lot of that is driven by just the national security interests around the AI space generally.

Yeah. And, as you know and mentioned, there's a lot of volatility in this space. Like, I know it's not related to your fund, specifically, but I saw what happened to quantum computing stocks just because of one, thing that came out that said they're, another seven or 10 years away rather than five. Right. And they all were down 40, 50, 60% in a handful of days. So we've definitely seen volatility in the space that you're playing in. And does AIS manage risk a little bit in your active stance? Or is it still more of a fundamental reweighting? You're not going to be trading just because there's headlines. So I agree.

Look, there is definitely look, look when DeepSeq came out, right? The whole news about DeepSeq a couple of weeks ago. the whole sector just got clobbered. Of course, it's all clawed back because I, people believe that was overblown. But we don't actively manage for volatility. However, if you look at the performance characteristics of AIS versus the other products in the market, I think because of our focus on the infrastructure versus some of the kind of front end applications, our volatility profile is quite a bit lower on average than most of the products out there or most of the ETFs out there. So and part of that is due to the breadth of the portfolio. Right now, actually, we're even higher than we were, the 72 number was probably before the rebalance.

So with that being, that being said of kind of adding some additional names as this space continues to grow, I'm sure in your analysis, you're looking at. Existing companies in the portfolio to kind of evaluate their durability and and do they still have a competitive advantage in the space? Is that something you guys are doing on an ongoing basis as well? That's part of the constant process.

And that's really about finding those risks. So, we have to make sure that the companies that are currently the leaders, that their technology edge is still intact and that they their pipeline is still being grown from an AI revenue perspective. And then, what new companies are emerging that could take the crown in those specific portions of the supply chain that may be not on the radar of other people. So those are that's that's a critical piece of the puzzle right there.

Find those opportunities. I imagine. evaluating the current portfolio is easy. Trying to keep track of all the new issues and all the new opportunities, just given the growth and the excitement in the space might be the harder part of the equation. Yeah.

And that's why having the practitioners, we think, is a massive competitive advantage that I don't think anybody in the space has. having people, Sonny and John, that are in the space, have been in the space since the beginning and understand the landscape and who all the players are. And frankly, in Sonny's case is involved with building data centers around the world. So, he's they know who the players are probably before most people do because they're working with them.

Yeah. Makes a ton of sense to me. So million dollar question, you guys are sitting down, you're you're selling the fund. You might be sitting down with a financial advisory group or an advisor. Where where are you recommending kind of slotting an allocation to AIS?

Yeah, it's a growth equity product for sure. That's what the exposure provides. So, we I always position it as a as a satellite to your core equity. it's depending on what your risk tolerances are, of course, and what your your clients are looking for. But, it's three to five percent, slug out of your core equity exposure. If you believe in the space and you believe in the long term growth process.

Well, I don't know how is how as an investor and how widely utilized this stuff is becoming that you couldn't be excited about the space or want some exposure. But, Adam, I really appreciate your time before I let you go. I got to ask you, where can people learn more about Vista shares and find all the information on your ETF?

Yeah, our website is VistaShares dot com spelled just how I how it sounds. We have a nice presence on LinkedIn and on X. We are we have a great newsletter on LinkedIn as well. We're putting a lot of effort and time into content. We think content is crucial, educational content around the space so investors can really understand, what it is they're looking at beyond AIS, which is, of course, the ticker of the ETF. But it's really about education and, letting investors understand the space. And then hopefully they come to AIS when they want that exposure.

Well, again, I have a feeling, given your background and given the company, that probably not the first time we're talking. I know you're not going to be able to talk about any future issues that your releases or ETFs you guys may do. But I have a feeling there'll be some other opportunities for us to talk. But again, Adam, thank you so much for your time. Thank you very much. I appreciate it. Thank you. Thank you. Thank you. Thank you.