Kenneth Lamont examines strategies for gaining exposure to the robotics investment theme that is currently captivating many investors.
ETFs that attempt to profit from a specific theme or global mega-trend have been among the surprise winners over the past couple of years. Of these thematic exposures, robotics has really caught investors’ imaginations. The two UK-listed ETFs providing equity exposure to the robotics and automation theme have collected assets under management of £3 billion, an eyebrow-raising sum.
So what advice should investors follow to make sense of and benefit from this hugely promising investment theme?
1) Count on falling costs and catalysts
Robotics has long been seen as the technology of the future, but many people believe we are now approaching a critical tipping point in its use. Automation costs have been falling steadily. In many cases, they have already undercut the cost of equivalent human labour.
Firms such as Amazon have thrown their weight behind the use of robotics in optimising their supply chains. Meanwhile, rapid advances in technologies such as machine vision, motion sensing, and image and voice recognition have become catalysts for growth in the robotics field. In sectors as diverse as healthcare, defence and manufacturing, the potential for growth is impressive.
2) Consider ETFs to counter significant risk
The risks associated with investing in individual robotics firms can be significant. This is especially true when backing small, fast-growing firms, which may only have a single product line and be highly vulnerable to market movements or regulatory changes. However, by using an ETF to invest in a broad basket of equities, single-stock risk is reduced and diverse exposure to the robotics industry maintained. Moreover, ETFs are more transparent than active funds and charge lower management fees.
3) Examine the various ETF options
The Robo Global Robotics and Automation ETF (ROBO), launched in 2014 by ETF Securities and bought by Legal & General Investment Management last year, physically tracks about 90 robotics firms. It selects companies that derive all or a high proportion of their revenues from the manufacture of robotic or automation products and the provision of related services.
The ETF is designed to capture companies throughout the production value chain, so manufacturers not just of physical robots, but also of the software and technology that enable automation, for example.
A newer rival, the iShares Automation & Robotics ETF (RBOT), has grown aggressively and now dwarfs the Robo Global ETF in terms of size. In selecting holdings, the fund picks stocks that derive most of their revenue from very granular technology sub-sectors, including artificial intelligence, nanotechnology, manufacturing robotics and wearable technology. At first glance, the funds appear similar, but a closer look reveals a different story.
4) The devil is in the detail
The key difference between these funds lies in their fees. The iShares ETF levies an ongoing charge of 0.4 per cent, which is half that of its rival. This differential has proved a trusty tailwind for the iShares ETF since inception.
While both funds claim to track the same theme and hold a similar number of stocks, the overlap in holdings between them is remarkably small. At the time of writing, the two funds share only 28 holdings. To put that into perspective, the iShares ETF shares 39 of its holdings with the broad MSCI World index.
Both funds include Renishaw, an engineering company involved in activities ranging from jet engine production to the manufacture of brain surgery technology. Meanwhile, Splunk, the memorably named big data software provider, is overlooked by the Robo Global ETF but included in the iShares ETF. The differences are not limited to smaller firms. The iShares ETF includes the tech colossus Apple, whereas the Robo Global ETF holds industrial giant Siemens.
The iShares fund’s inclusion criteria result in a heavy tech tilt across specific subsectors such as AI, while the Robo Global ETF favours industrials and healthcare firms. Geographically, the Robo Global ETF has a US bias, whereas the iShares ETF is more diffuse and favours Taiwan.
Another key difference is in the weighting methodologies employed. The iShares fund weights all holdings equally, while Robo Global prefers ‘bellwether’ stocks. These stocks have been identified as having the most focused robotics exposure and should, therefore, be the most responsive to industry growth.
5) Scrutinise the performance data
Since launching in 2016, the iShares fund has had the performance edge. Its comparatively low fee should continue to play in its favour. However, much of its outperformance has come from its exposure to a boom in the IT sector that may not prove sustainable.
When assessing such funds, remember that they are designed to profit from a long-term global trend that is still in an early stage of development. We should therefore focus on how well funds provide exposure to what is actually a subjectively defined robotics industry. With this in mind, the Robo Global ETF stands out, as it has a preference for ‘pure’ robotics stocks.