Technology is one of those sectors where consumers and investors are constantly looking for the next big thing. The truly innovative service or product that is going to have life-changing impact and ultimately lead to extensive profits for shareholders. One of the emerging frontiers in this race is the application of robotics and artificial intelligence in our everyday lives.
Companies that research, develop, and bring to market ground-breaking robot technology can make a significant contribution to both businesses and ordinary consumers. Not surprisingly, there are now several ways for investors to play this thriving industry through diversified and globally-focused exchange-traded funds (ETFs).
The largest and most established ETF in this class is the ROBO Global Robotics and Automation Index ETF (NASDAQ:ROBO). This fund has $576 million dedicated to a group of 85 stocks around the world engaged in the hardware, software, and management of automated products or services. That may include autonomous vehicles, 3D printers, navigational systems, medical devices, and more.
Because this fund is index-based, it’s portfolio construction and stock weighting criteria are determined by a strict rules-based methodology. For stocks to be considered, they must meet minimum market capitalization and historical daily trading minimums. Under normal circumstances, the index allows for 40% of the portfolio to be dedicated to foreign stocks as well.
The top holding in ROBO isiRobot Corporation (NASDAQ:IRBT), which accounts for just over 2% of the asset allocation. The smaller footprint of this stock within the diversified ETF helps minimize the single-stock risk that is inherent with stock picking or more focused investment strategies.
ROBO debuted in 2013 to a smattering of attention and relatively modest growth. However, over the last twelve months, the ETF has soared +40.92% and recently hit a new all-time high. That easily bests the sector-specific benchmark TTechnology Select Sector SPDR (NYSE:XLK) return of +32.82% and significantly outperforms the broader market as well.
ETF investors have clearly taken notice of this trend as evidenced by a steadier trading pattern and surging volume in the chart above. According to data from ETF.com, this fund has gained $416 million in net new money over the last year. That makes up approximately 72% of ROBO’s current assets under management. The combination of strong returns and an attractive growth story likely make this an appealing thematic fund for tech-savvy investors to identify with.
There is also another relatively new competitor to ROBO that is off to a great start in its first year of existence as well. The Global X Robotics & Artificial Intelligence Thematic Index ETF(NASDAQ:BOTZ) is a more concentrated approach to the industry that holds just 28 stocks. The top holding, Intuitive Surgical Inc (NASDAQ:ISRG) represents nearly 8% of the exposure within the index.
This top-heavy distribution of capital may appeal to those who are seeking a differentiated approach in the robotics industry. According to the fund fact sheet, 48% of the holdings are Japanese companies and just 21% reside in the United States. The smaller selection of stocks in BOTZ truly represents an enhanced international footprint than ROBO.
The performance of this fund has slightly trailed that of ROBO over its short eight-month lifespan. It has still managed to accumulate nearly $100 million in assets under management, which is impressive for an upstart thematic ETF with little track record.
Those who are considering these types of ETFs should also be aware of their expenses as well. ROBO charges an annual expense ratio of 0.95%, while BOTZ comes in at 0.68%. These management fees are high when compared to ultra-low cost sector ETFs. However, it’s common practice that niche strategies or uncommon industries will entail a proportionately larger expense to run.
The Bottom Line
The recent success of the robotics ETFs has brought with it a concomitant rush to capitalize on an outperforming area of the market. The real test for these funds will be whether the assets stay put during a prolonged slump or enhanced volatility.
Thematic funds can be useful for investors that want to capitalize on an industry-specific trend or simply overweight a portion of their sector exposure using a unique ETF. Before considering these funds for your portfolio, it’s important to evaluate how they fit with other existing positions and if their risks are appropriate for your investment style.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.