CHIP ETF Targets the Next Phase of the AI Buildout

SPEAKER_1 (0:00)

It's time for our ETF Watchlist segment. Joining me right now, Bill Birmingham, Head of Research at REX Financial. Let's talk about the chip equipment stocks, why they matter. Tech is obviously an area people love to invest in.

And the build out, most of our guests tell us how we're in the AI revolution, in the third inning and so on. Where are we with this, and why are the chip equipment story such an important one?

Bill Birmingham (0:27)

Well, the chip equipment story follows the design and fabrication capex cycle by about 12 to 18 months. So what we were seeing was the hyper focus on the upstream stocks and themes that were dominating the AI market. And if you look closely, AI chip makers are an excellent but yet under represented part of the ETF landscape. And so we felt like this was a really good opportunity to give people a broader and downstream exposure to kind of the picks and shovels of the industry where you don't have to bet on chip design, given that every advanced chip depends on these equipment makers.

SPEAKER_1 (1:08)

So obviously the need is there. Tell me about this ETF chip.

Bill Birmingham (1:14)

Yes, so the chip ETF tracks, passively tracks the Vetify AI chip making index. We work closely with our partner at Vetify to craft an index that we thought would really give investors exposure, both to the central chip making themes, but also kind of on a weighted basis and on a global basis in a way that they normally can't get or it would be very difficult to do on an individual stock basis. So it's about 55 global companies scattered across the United States, Asia and Europe. It exclusively focuses on chip wafer equipment manufacturers. So about 50 percent of the fund is put into those stocks, and then the other 25 is put into advanced packaging and 25 percent into metrology. So we are trying to capture where both the growth and the advantage in the chip making equipment sector lies.

SPEAKER_1 (2:12)

I think it's interesting that you talked about the timing here because you also talked about equipment growth and how it can in fact outlast the chip stock rallies, right? Because of the way it's set up, the equipment orders actually trail the demand. Tell me about that.

Bill Birmingham (2:28)

Yeah. So if you look at the announcements, and everyone looks at them extremely closely from the Hyperscalers, and then you layer on the CapEx from the Neoclouds, whether it's Oracle or CoreWeave or Nebius, and you're coming into substantial multi-billion dollar, close to a trillion dollar estimates for 2026 alone, let alone for 2027 When you look at the chip making stocks or the chip equipment stocks, their order books really don't benefit from this for at least 12 to 18 months as it flows into the fab sector, and then it flows into the tool making sector. We see this as a real extension of the cycle, and that is a very important piece of the puzzle for people who are looking for AI exposure. But also I'd like to point out there's probably two or three other drivers in this sector that are very durable, and that sits somewhat outside of just the AI capex cycle that you're seeing upstream. The first is that there's a massive build out of government support to try to diversify supply chains towards home regions, whether it's the United States, China, India, Japan, to a lesser extent the EU. Everyone's trying to be self-sufficient in their chip supply chain. While that doesn't add overall demand to the number of chips, what it does do is it adds a lot of excess demand to the tool makers because now you have fabs that are being built in various parts of the world, that all need equipment sets and testing and packaging in order to satisfy these national goals.

If you look a little bit further also, these advanced chips have maybe close to a thousand if not more steps in the processing. As the complexity grows, the chip making equipment also becomes more and more specialized, which benefits this very select group of companies.

Then as packaging and memory also become more complicated, the ability to create very specific packaging to help transistors scaling or to bind high bandwidth memory, all become extremely narrowly focused towards just a few set of companies. We see many ways that in addition to the capex cycle, that these individual chip making equipment companies are going to benefit from this more advanced AI and just broader based chip trend.

SPEAKER_1 (4:46)

Bill, thank you so much. Great to speak with you, Bill Birmingham, head of research at REX Financial.