This time, we will present our readers with the ROBO Global® Robotics and Automation Index ETF (NYSEARCA:ROBO) which was incorporated back in 2013. It has a total AUM of approximately $920 million and comes with an annual expense ratio of 0.95%. It has been distributing its shareholders a regular annual dividend payment of less than $0.16 per share over the last couple of years. Unfortunately, that makes up a very low dividend yield of 0.34% as of July 20, 2020.
We are bullish about this ETF, given the importance of automation and digitization to deal with the COVID-19 pandemic. For instance, automation enables companies to solve the issue of social distancing and prevent the spread of coronavirus, by utilizing robots or automated production lines. In terms of the key bullish catalysts, we find them as the following: (1) increased corporate investments in automation & artificial intelligence in the most important industries like manufacturing, e-commerce or healthcare, (2) positive secular trends of automation & artificial intelligence will most likely persist in the post-pandemic era over the next couple of years.
About the Fund
(Source: Factsheet)
This fund primarily invests in equities of applicable companies worldwide, which are somehow involved in the automation or artificial intelligence businesses. For example, by producing robots, automated production lines, or by providing software that uses artificial intelligence to automate repetitive tasks, which have been previously conducted by human labor. We believe that an enhanced level of automation and artificial intelligence in manufacturing, healthcare, and consumer staples industries should enable our society to receive so-called ‘essential’ products or services even in the case of worsening of the coronavirus pandemic in the near future.
For instance, global car manufacturing companies like Tesla (TSLA) have been negatively impacted by the nation-wide lockdowns earlier this year, as companies were forced to shut down their production lines. Elon Musk went even so far to reopen the largest Tesla’s factory in California earlier than restrictions were lifted. Further, he even threatened to move a particular factory to Texas, where coronavirus-related restrictions were a bit milder compared to California. For example, if we assume that Tesla would have a completely automated production line run by robots and supported by artificial intelligence without any need for human labor then Tesla could have a full production utilization even during a coronavirus-related lockdown.
“Amid situation where discrete and process industries are operating with limited workforce (due to layoffs and job losses), deployment of automation and robotics are enabling businesses to sustain their production levels with minimum risk and exposure of workers to coronavirus epidemic.”
(Source: Meticulous Research)
That could create a great competitive advantage over its more traditional competitors like Ford (F) or General Motors (GM), which have been lately facing some issues with coronavirus-infected patients after the restart of their production facilities. In our view, a fully automated manufacturing production line solves the most important issue of social distancing between workers when it comes to the prevention of the spread of coronavirus. Unfortunately, robots can easily work 24 hours a day compared to human labor, while they can stand less than 6 feet apart, and don’t require sick leave because of a coronavirus infection. Therefore, it makes such manufacturing companies with fully automated production lines resilient to weather any additional coronavirus-related storms or even any other pandemic over the next couple of years.
On the other hand, automation and the use of artificial intelligence in healthcare have been of crucial importance to battle the COVID-19 pandemic in developed economies. For instance, the implementation of virtual healthcare assistants or online doctors enables patients to undertake some of the most common visits to hospitals from home. As a result, our healthcare institutions were able to allocate a higher number of front-line workers to fight the COVID-19 pandemic. In addition, the increasing number of nursing and surgical robots in our hospitals might act as a very important tool to battle the COVID-19 pandemic. There have been quite some cases in Europe when a nurse was infected by the COVID-19 in an elderly home and unfortunately spread the disease to other older residents.
“A report by academics based at the London School of Economics found that in Italy, France, Ireland, Spain and Belgium between 42 percent and 57 percent of deaths from the virus have taken place in nursing homes.”
(Source: Politico)
In the case of a fully automated elderly home with nursing robots and online doctors, the spread of coronavirus infections in facilities with the most critical population could be severely limited. Another important tool to prevent the spread of coronavirus is a camera that utilizes a software powered by artificial intelligence to detect body temperature so visitors with high body temperature are prevented from visiting an elderly home, a school, or even office.
To sum it up, we cannot neglect the importance of increased levels of automation in the corporate world to fight the present COVID-19 pandemic environment, labeled by an increasing number of global infections, health-related risks after the reopening of ‘non-essential’ industries and devastating impact on the daily operations of healthcare facilities. Solving those issues, as we try to return our lives and economic activities back to normal which will be present in the foreseeable future, will create the most important secular trend during a post-pandemic environment. In our view, that creates an enormous total addressable market potential for all the companies involved in the automation & artificial intelligence-related businesses in both traditional manufacturing or healthcare industries.
(Source: Statista)
According to the figure above, the total addressable market for artificial intelligence software might reach $126 billion by 2025, what makes up a CAGR of approximately 43% between 2020-2025.
Top 10 Holdings
(Source: Fund’s Website)
The top 10 list consists of well-known tech and healthcare companies including Nvidia (NVDA), Intuitive Surgical (ISRG), and Cognex (CGNX), which are shaping the future of the fully-connected and automated world. We believe that all of the holdings on the top 10 list are well-positioned to capture the future automation and digitization trends of our daily lives and the corporate world after the end of the coronavirus crisis.
However, we are still facing worsening of the coronavirus crisis in the US and many health experts are worried that even a stronger second or third wave might occur later this year or in early 2021. In general, companies with a key focus on automation & artificial intelligence have been resilient so far in H1 2020. They have received an increased number of orders from a surge of e-commerce companies, as plenty of traditional retailers have decided to transition their retail space into a warehouse during a lockdown period.
CEO Robert Willet of Cognex stated the following:
“While some customers are accelerating activity, notably companies in China and in e-commerce fulfillment, many others are struggling to implement capital spending plans or are putting those investments on hold.
(Source: Seeking Alpha)
Even some private fast-food restaurants like White Castle, have decided to use robots that can fry Pommes Frites as reflected in the following video. Another very important short-term growth area that can help our society to battle the COVID-19 pandemic is a fully automated pharmaceutical production line combined with wholesale operations. We believe that it is of crucial importance for our society to have an uninterrupted delivery of the most essential drugs and later vaccines for COVID-19 treatment. For instance, a continuous reoccurrence of coronavirus infections in the key pharmaceutical factories might trigger a vast number of production line shutdowns. That creates a huge health-related risk for our society as that could negatively impact the supply of most essential drugs.
In general, companies like Daifuku (OTCPK:DFKCY), Brooks Automation (BRKS), and Fanuc Corp. (OTCPK:FANUF), which produce robots and tools for automated production lines have experienced a slower demand than expected from negatively impacted 'non-essential' manufacturing companies. One of their most important customers is key semiconductor producers, which were forced to cut down capital spending because of the coronavirus outbreak.
CEO Steve Schwartz of Brooks Automation stated the following:
“In Semiconductor, we saw strong orders and have healthy backlog but we also know the WFE CapEx environment comes down to the path which the chipmakers decide to take. And in this time in particular, the OEM customers depend on broad supply chain that is vulnerable.”
(Source: Seeking Alpha )
Management of some companies including Cognex and Fanuc group in the top 10 list has provided a cautious outlook over the future short-term business environment related to the coronavirus crisis, primarily driven by uncertain capital spending plans of key manufacturing companies.
“The overall business environment surrounding the FANUC Group during this period (from April 1, 2019 to March 31, 2020) was harsh, due primarily to the cautious approach to capital investment mainly in the Chinese market, stemming from the impact of the trade friction between the United States and China. In addition, as the impact of the coronavirus (COVID-19) became more severe towards the end of the period, the business environment became very difficult and unforeseeable.
(Source: Earnings Release)
Performance
Over the last 5 years, both historical market price and NAV have been in the wide range of $30-$45 per share. After the initial domestic outbreak of the coronavirus in March 2020, both NAV and market prices have declined below the previous bottom of $30 per share. The latter was reached in late 2018 as a result of the global stock market meltdown because of the U.S.- China trade war. After the easing of coronavirus-related restrictions in the U.S., both NAV and market price have managed to track the pullback of the broader stock market and tech-related stocks over the last couple of months. Recently, ROBO has reached a new all-time record stock price of above $46 per share. Therefore, our readers might consider looking for the so-called 'buy-the-dip' opportunity if the general stock market indexes crash over the coming months and take the stock price of this ETF lower.
(Source: Fund’s Website)
Our readers can find more information about the historical annualized total return performance of this ETF in the figure above.
This chart indicates that the fund has underperformed the largest tech-related ETF on the market - the Technology Select Sector SPDR Fund (XLK) by approximately 18% year to date. If we compare ROBO with key U.S. stock market indexes during the same time period, then it has outperformed the S&P 500 index (SPY), while it fell behind by a wide margin compared to the Nasdaq 100 (QQQ).
If we take a look over a longer time period of the last 5 years, then ROBO has been a better pick compared to the broader S&P 500 index, while both QQQ and XLK have significantly outperformed ROBO. Based on this historical performance analysis, we can conclude that investors would be better off to invest in the basic tech-related ETFs like XLK or just in the simple Nasdaq 100 index, which is predominated by the largest tech companies. However, historical performance doesn’t impact the future performance of this ETF, therefore we remain optimistic that this performance might look different 5 or 10 years from now. In our view, it should be primarily driven by positive secular trends of automation and digitalization of our society over the next decade.
If we expand our historical performance analysis to some of the most popular tech-related ETFs then ROBO has underperformed both the First Trust Cloud Computing ETF (SKYY) and the iShares Expanded Tech-Software Sector ETF (IGV) by a wide margin of approximately 2000 bps year to date. Furthermore, both the iShares PHLX Semiconductor ETF (SOXX) and the ETFMG Prime Cyber Security ETF (HACK) achieved a slightly lower outperformance of approximately 500 bps compared to ROBO.
If we take a look over a longer time period of the last 5 years, then ROBO has only outperformed HACK, while all the other ETFs have significantly outperformed ROBO by more than 80%. Our readers should keep in mind that ROBO consists of primarily high-growth tech companies, which in general pay no or a very small amount of annual dividend per share.
(Source: Seeking Alpha)
Likewise, shareholders have been awarded so far with a regular annual dividend of less than $0.16 per share since 2014. In fact, this fund has paid an annual dividend of $0.1558 in 2019 which makes up a dividend yield of approximately 0.34% as of 07/20/2020. Therefore, this ETF is definitely not suitable for investors who are looking for high-yield dividend opportunities.
Conclusion
We assign a BULLISH outlook as we believe that automation and artificial intelligence is the most appropriate tool to solve the negative consequences of the coronavirus crisis and return our daily lives closer to a normal before there is an available vaccine on the market. In addition, we believe that automation and artificial intelligence will be one of the strongest secular trends over the next decade and will create additional jobs and emerging business opportunities, which might arise with the implementation of the 5G network.
We believe that our readers should definitely consider investing in it, as a bet over a futuristic fully connected, and automated world. Nevertheless, our readers should keep in mind that the past performance of this ETF couldn’t exceed the general performance of some software or e-commerce companies like Amazon (AMZN) or Microsoft (MSFT). In fact, based on historical data, this fund has achieved a lower total return compared to both the broader S&P 500 index and the most popular tech-related ETF - XLK. In terms of major risks, investors should consider the following: (1) any kind of unexpected worsening of the coronavirus crisis in the near team, (2) political risks like an escalation of social unrests throughout the U.S or a deterioration of economic relation with China, (3) current high valuations of tech companies and the general Nasdaq 100 index after the strong pullback since March 2020.