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ROBO Global Robotics and Automation Index ETF (NYSEARCA:ROBO) exposes investors to emerging technologies such as artificial intelligence and machine learning, which are quickly evolving and becoming more popular. Revenue in the artificial intelligence industry is forecasted to reach $1.6T by 2030. Moreover, the robotics industry has similar growth potential as the use of robots in industries like manufacturing, healthcare, and logistics is expected to increase as companies seek to reduce costs and increase efficiency.
ROBO has a solid, well-diversified portfolio, with over $1.3B AUM and no single security comprising more than 3%. This being said, ROBO is moderately risky with a standard deviation of 34 (vs. median of 24 in the rest of the market and a 26% turnover (vs. median of 31% in the rest of the market). Investors can therefore expect some short-term fluctuations, but with potentially high long-term returns.
Despite the previously-listed growth prospects and positive metrics, ROBO’s high expenses and susceptibility to supply chain disruptions ultimately forced me to take a more neutral position. The ongoing semiconductor shortage will decrease the demand for chips and may hurt the profits of many companies in ROBO. ROBO has an expense ratio of 0.95, which is concerning given the importance of costs in passive investing. Much of this spending comes from the capital expenditures and long-term investments of robotics companies. High inflation makes capital expenditures a much greater liability and risk, which could further hurt the profits of companies held in ROBO. Therefore, I give ROBO a Hold rating.
Strategy
ROBO tracks the ROBO Gbl Robotic&Automat TR USD Index and uses a full replication technique. The full replication technique involves holding all the same securities that comprise the underlying index, also with the same weighting. ROBO invests in both growth and value stocks of varying market capitalization. This ETF aims to profit from the growth potential of robotics and artificial intelligence industries. The companies within holdings are mainly involved in the development and deployment of robotics, automation, and artificial intelligence.
Holdings Analysis
ROBO currently has 92 holdings, with allocations mainly in technology (45%), industrials (40%), and healthcare (10%). The anatomy of this ETF is similar to that of Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ), which I have written about previously. Investments in industrials and healthcare provide sector diversification while potentially profiting from the integration of robotics and artificial intelligence into the fields. The companies held in ROBO are mostly located in the United States, Japan and Europe.
ROBO is well-diversified, as the top 10 holdings comprise only 18% of assets, and the top 25 account for just 40%. Furthermore, the most prominent stock in ROBO only accounts for 2.8%. This translates to ROBO being more immune to single-stock risk than more concentrated ETFs. Some specific specialties found within ROBO’s holdings include industrial automation, drones, 3D printing, and autonomous vehicles.
Strengths
ROBO is not highly-concentrated, meaning investors do not have to worry about the performance of a single company significantly hurting returns. ROBO is also decently liquid, providing added flexibility and confidence in investors that they can easily sell out of shares they no longer want to keep. This ETF has a 30-day average daily trading volume of over 110,000 shares, which equates to more than $5mm. Given that this ETF is quite volatile, its liquidity serves as an extra layer of insurance for investors that are more risk-sensitive.
Weaknesses
ROBO’s Expense Ratio is on the high side, at 0.95%. For many ETF companies, staying below 1.00% is a goal, since consumer psychology equates 1.00% to being much more than 0.95%. This is similar to why gasoline at the pump is typically priced at just below a full dollar amount. So, ROBO is “toeing the line” at 0.95%.
High interest rates put companies like those held in ROBO at risk, as spending becomes more of a liability, given higher borrowing costs for expanding businesses. ROBO is also significantly more expensive than its peers like BOTZ and IRBO which have expense ratios of 0.68% and 0.47% respectively.
ROBO’s more than 20% allocation to Japanese stocks may create currency risk associated with having investments which are translated back into US dollars from Japanese yen. Currency risk is especially high for the Japanese yen because of its previous role as a safe-haven currency, at a time when its interest rate policies are loosening for the first time in decades.
Opportunities
The number of deaths in the workforce from COVID-19 from 2020-2022 has increased prioritization and concern over employee health. Sectors with the most COVID-related deaths include transportation, food preparation, construction, and mining. While industrial robots become more competent and affordable, they're also potentially less of a liability than human employees, particularly employees who are immunocompromised. Therefore, implementing robots in certain professions may make them substantially safer and even save lives in the event of another pandemic. Moreover, a potential re-acceleration in the economy after a bearish 2022 has produced noticeable wage inflation for the first time in years. This may prompt companies to invest more in automation technologies in an attempt to reduce wage pressures and labor costs.
Threats
Spontaneous price fluctuations in Japanese yen could generate volatility in the prices of Japanese robotics stocks, lessening the safety and ultimately hurting the returns of the Japanese companies in this ETF. The Japanese yen has historically become volatile after changes to global trade flows and increased geopolitical tensions with surrounding countries, especially China and North Korea. Investors should know that both of these situations could reappear or worsen, negatively impacting returns.
Furthermore, the global chip shortage has drastically reduced semiconductor demand in recent months with recovery just now making way. This shortage hurt the production and sales of companies involved in producing semiconductors, leading to reduced earnings and stock prices. As many companies held in ROBO are involved in the semiconductor business, any extension of the chip shortage could deteriorate investors’ returns. Decreasing circulation of semiconductors in the market could hinder the development and application of new technologies that require said infrastructure. This would hurt the earnings of other companies held in ROBO.
Conclusions
ETF Quality Opinion
ROBO has the potential for long-term growth as the robotics and automation industry continues to expand, however, this ETF’s high costs may cause investors to do a double-take. While I believe ROBO will eventually benefit from technological advancements, it also remains quite vulnerable to market shocks, which is why my initial rating is neutral. But this ETF is definitely on my watchlist for the future.
ETF Investment Opinion
I rate ROBO a Hold when considering a 3-5 year timeframe. While ROBO is highly expensive and earns a Hold rating for now, investors with a long-term bullish perspective on robotics and artificial intelligence may consider similar ETFs. BOTZ invests in similar companies but has a $1.5B AUM and an expense ratio of only 0.68%. I recently initiated coverage of BOTZ with a Buy rating, while rating its peer ETF, ROBO, a Hold for now.
