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A few months ago, a subscriber asked me to take a look at a fund on his interest list, the Global X Robotics & Artificial Intelligence Thematic ETF (BOTZ), which we did in the article “BOTZ: Looks Great In The Window, But Won’t Take It Home.”
The fund focuses on investing in companies involved with robotics and artificial intelligence, two technologies that are found in almost every major industry today and will impact us almost universally in the future. These are major themes, and why sponsors are creating ETFs and mutual funds to take advantage of them. As such, these are “thematic ETFs.”
Unfortunately, despite the best intentions and being a terrific marketing idea, many of these funds end up being poor investments vs. more broadly diversified funds.
Two reasons which we discussed and as found in BOTZ are (1. very niche themes will often have a small selection of investments and thus the ETF is forced to purchase all, including the mediocre and bad investments, and (2. generally, the bigger beneficiaries of disruptive technologies have not been the companies themselves but rather their end users. Prime examples of this are GoPro (GPRO), 3D Systems Corp (DDD) ,and as we are most recently seeing with the IPOs of both Uber (UBER) and Lyft (LYFT).
In that same article, we did identify another competing fund which seemed to do better, the Robo Global Robotics and Automation Index ETF (ROBO).
Is this a better idea? A better implementation of the theme? Let’s take a look.
Investment Case
In our previous article we discussed the investment case for investing in this theme. Advancements in robotics are making machines more and more capable. Robots are able to perform a more consistent job while producing things faster and more accurately.
Robotics are helping in multiple ways such as making human jobs easier or even replacing humans in positions where lives would be in danger such as nuclear clean ups.
RoboGlobal believes that this space is worth your investment as it focuses on companies that produce technologies and application that have potential to drive and propel global economic growth and productivity.
Fund Basics
- Sponsor: Robo Global
- Index: ROBO Global Robotics & Automation Index
- AUM: Approximately $1.335 billion (5/17/2019)
- Historical Style: Foreign Blend
- Investment Objectives: Seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the ROBO Global Robotics & Automation Index.
- Number of Holdings: 88 securities.
- Current Yield: .32%
- Inception Date: 10/21/2013.
- Fees: .95%.
Source: YCharts & Robo Global
The Index and The Fund
As with the Global X fund, ROBO does a great job painting a marketing picture for the fund. The three main points presented by the sponsor are that investors receive global exposure that’s diversified across market capitalizations and that the index is run by industry experts specializing in robotics, automation and artificial intelligence.
Source: ROBO 3/31/2019 Facts Sheet
Unlike the Global X fund, Robo Global uses their own proprietary index and thus the index information is quite easy to find. In fact, at times it was tough to recognize if I was on the ETF’s website or the website for the methodology.
If you are interested in investing in this ETF, you can find the underlying index methodology here.
The underlying index was launched on Aug. 2, 2013, a few months before the ETF was formed.
So, let’s dive into the index methodology.
The index starts with the investable universe of companies in the ROBO Global Database. This is a proprietary database of companies that are selected by the sponsor.
In order to be included in the index, the companies must be publicly traded and fit into one of the identified subsectors.
One feature that makes it seem “active” in management is that the companies must be “in a position of market and technology leadership.” Not quite definable by typical metrics which we are used to seeing in typical index ETFs.
Lastly, the companies must pass the ROBO Global ESG policy, something that some investors may be for or against. Interestingly, the first mention I saw of this is in the methodology and not on the fact sheet.
Source: Robo Global
Unlike the Global X fund which focused on four areas of investment, the ROBO index focuses on 12, broken up into two main areas, “Technology” and “Applications.”
What’s quite unique here and I appreciate is that unlike the Global X index, this methodology focuses on both the development of robotics and also on the companies that integrate it, or the “applications” bucket.
Source: Robo Global
The index then defines the 12 subsectors of “technology” and “applications.”
Source: Robo Global
The components are then broken down into “bellwether” and “non-bellwether” and get allocated to a split of 40%/60%. “Bellwether” implies whether the company is a pure-play focused on the robotics theme or “non-bellwether” implying it is exposed to it. All of those components within each split are equally weighted.
Source: Robo Global
This is why I believe ROBO has quite a few more components than BOTZ.
The portfolio is then reviewed and rebalanced quarterly.
Turning to the fund, we can indeed find that it’s fairly well balanced.
Looking at the top 10 holdings shows us a fund where the top 10 holdings represent just over 18% of the fund, unlike over 60% for the competing ETF.
Source: YCharts
One of the holdings that instantly “lights up,” pun intended, is FLIR Systems (FLIR), the maker of numerous vision technologies such as infrared/thermal scopes and systems being used by militaries and gun owners.
They were not excluded by the ESG policy?
Source: ROBO ESG Policies
Personally, I do not have issues with FLIR and I believe they produce some terrific products, but I suppose some investors who do follow strict ESG and “socially responsible” guidelines may have an issue with ROBO owning more than $22 million in (FLIR) shares despite it being a drop in the $6.63 billion market cap.
Moving on, we find that this is largely a global themed portfolio with US companies making up only 44% of the portfolio. (This is greater than the 30% or so for BOTZ). Japan, Germany, Taiwan and Switzerland round out the top 5. I do wish there was more China exposure.
Source: ROBO 3/31/2019 Facts Sheet
Breaking it down by industry, we find the fund is very well diversified.
Source: ROBO 3/31/2019 Facts Sheet
Looking at the market capitalization breakdown, we see that the fund is skewed toward small and mid caps where they make up more than 66% of the fund, quite a bit more than the 40% or so we saw in BOTZ. This will likely make the fund more volatile and it should show up in the beta. 
Source: YCharts
The fund has been successful in raising capital which now sits at $1.299 billion or so. Interestingly, while the fund did launch prior to the Global X fund, it now lags behind it. Is it simply investors seeking a larger sponsor? Or does Global X have more marketing capabilities?
Without a doubt, the fund was certainly helped by the rise in the price per share.
In any case, the bulk of the assets going into the fund seemed to come in 2017 and the first few years it failed to raise meaningful capital.
Data by YChartsWhat’s most peculiar however is seeing the confirmation of the above chart.
Over the last three years, the fund raised $1.222 out of the current $1.3 billion.
Furthermore, it lost $699 million in assets due to outflows in the prior 12 months.
Source: YCharts
I suppose one reason for this is investors leaving the fund for the Global X or First Trust Robotics ETFs (ROBT), both of which carry lower annual fees.
Looking at the risk statistics provided by YCharts, we find the fund has a five-year beta of 1.128 vs. the S&P 500 and had a maximum draw-down of 32.8%. This is something any investor should be concerned about.
Source: YCharts
Performance
Year to date, the fund has done quite well and has achieved a 13.58% total return. It has not yet paid a dividend and is down quite a bit just in the first three weeks of the month.
Data by YChartsIt has been volatile over the previous 12 months and we find the investment down 11.51% on a total return basis and down 11.85% on a price per share basis.
Data by YChartsLooking back three years, we do see a winner with a 52.69% total return while the price per share increased 51.78%. It’s however prudent to point out that the gains came in 2016 through 2018 and the last 18 months have been quite difficult.
Data by YChartsSince inception the results are not as impressive and we find a total return of 47.74%. The price per share increased 46.01% during this time.
What’s important to note here is that all of the fund’s gains came in 2016 through 2018. Every other time period, inception through 2016 and 2018 through today have been flat to down years. This explains to me why we saw such an influx in capital… investors chasing returns.
Data by YChartsSo then the question becomes, “does the fund’s strategy and quarterly rebalancing help reduce volatility vs. its peers?”
Competitor wise we can take a look at the same investments we looked at before and the First Trust ETF which I just discovered. So, for this pool we have the ROBO ETF, the Global X Robotics & Artificial Intelligence ETF (BOTZ), the FT Nasdaq Artificial Intelligence and Robotics ETF (ROBT), the ARK Industrial Innovation ETF (ARKQ) and a global go-anywhere technology fund such as the Putnam Global Technology Fund (PGTAX). Lastly, we will compare the fund against the benchmark, the iShares MSCI ACWI (ACWI) ETF. (ACWI stands for “All-Country World Index”.)
As we can see, year to date, the actively managed Putnam Global Technology mutual fund leads the way followed by the First Trust ETF. ROBO does trail BOTZ however all have outperformed the underlying benchmark, the ACWI index.
I suppose a case can be made that perhaps the quarterly rebalancing and equal weight methodology capped the winners too early?
Data by YChartsOver the previous 12 months the trend continues, only now we are looking at two winners, the FT ETF and the Putnam mutual fund with both BOTZ and ROBO losing for the year. The ACWI index came in flat.
Data by YChartsLooking back to the earlier common time period, since ROBT’s launch we find the situation relatively unchanged. We do continue to see that ROBO’s equal weight methodology and quarterly rebalancing may have helped control the downside at the expense of missing out in bull markets.
Data by YChartsGoing back to Global X’s inception date we find the value the “active management?”
We can clearly see all of the funds participated in the broad rally through 2018, yet, the two actively managed funds, the Putnam mutual fund at the actively managed ARK ETF continued to grow while the two Robotics focused ETFs started selling off. The end result is that the actively managed funds meaningfully outperformed over the previous three years or so. ROBO and BOTZ did earn a return however it was lagging the other funds. At the same time, investors would have far less drama investing in the MSCI ACWI index.
Data by YChartsGoing back through to ROBO’s inception however we see the strategy put into perspective and I don’t believe anyone needs an explanation.
Data by YChartsBottom Line
I really thought I was going like it. I really did.
As my regular readers and subscribers know, when I cover a brand new fund I only do a limited amount of work beforehand, namely I open my research platforms, look at the marketing materials, find the prospectus, the index methodology, etc.
As such, my main preconceptions are just what I know about the sponsor, the general theme of the investment or perhaps from what I recall if we covered it as a comparable for another investment.
The bulk of my research is generally performed as I write the article and as you read it. This is why it’s generally an all day process for me. For this reason, when I start writing the introduction and say, “let’s take a look,” it includes us both!
While at first I thought ROBO would be an BOTZ clone, I became quite hopeful when we dove into the index methodology and learned that this ETF not only invests in the companies focused on developing the technologies, but also looks at companies who implement it.
Combined with a more diversified portfolio, equal weighting methodology and quarterly re-balancing, I expected to find a fund which I would be able to accept as a logical investment.
What we saw so far however is that while, yes, the equal weight methodology and quarterly rebalancing did lower downside volatility, they also caused the fund to lag in quickly upward moving markets.
In the last few years, one seemed to balance out the other and the performance between the two competing ETFs has been virtually identical.
What we do have to look at in the near future however is the First Trust ETF which outperformed both during its existence. Do add (ROBT) to your due diligence list.
Bottom line, we are once again reminded of the saying… “before you climb the ladder, make sure it is leaning up against the right tree.”
Here we find a thematic ETF that did precisely what it was supposed to do, except perhaps follow it’s own ESG guidelines with FLIR.
Unfortunately though, more and more I believe that this fund and the theme is a solution in search of a problem.
IF you want to have exposure to this sector specifically, yes, I do prefer ROBO over BOTZ, however I would want to look at ROBT before making a decision.
For most investors however I continue to believe that it would be best to drill down to no deeper than a broad, actively managed “technology” fund such as the Putnam mutual fund we looked at above. We have simply not seen any proof over any time period that the robotics ETFs can meaningfully outperform broader technology funds or even the underlying ACWI.
For all of these reasons, despite being a very interesting product in a very interesting space, I will continue to follow it and can certainly see reasons for someone investing in it, although I would not be investing my own money in the fund.
Thanks for reading! I hope that was helpful and look forward to your questions or comments.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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