Which Robotics ETF is The Best One to Buy?
While memes were created for people who can’t properly articulate their thoughts on paper, there are some funny ones floating around. One such meme shows a confused humanoid robot in Terminator (played by Ahhnold) looking at a phone book page which shows Sarah Conner’s name written as a captcha.
It’s some quality nerd humor that hints at how robots are becoming increasingly sophisticated over time, and our primitive methods of tricking them are probably already outdated.
In our guide to Investing in Robot Stocks and Companies, we broke down the robotics investment thesis into the following five areas:
- Drones – Not a lot going on for retail investors
- Autonomous Vehicles – Tesla seems to be the preferred play along with some LiDAR SPACs that we’re avoiding for now.
- Industrial Robotics – Lots of Japanese firms dominate this space. Maybe the biggest investment opportunity of the lot.
- Healthcare Robots – Largely relates to robotic surgery stocks, only one of which we like right now.
- Consumer Robots – The most notable stock in this space is robot vacuum company iRobot.
Robotics is one of the more mature disruptive technology themes we cover, which means there are lots of robotics stocks out there to choose from. Consequently, there are a number of exchange traded funds (ETFs) focused on robotics. Today, we want to figure out which robotics ETF is the best one to hold.
Five Robotics ETFs
A cursory search of the ETFdb.com database shows five thematic ETFs that target robotics (listed below with assets under management (AUM) in millions):
- Global X Robotics & Artificial Intelligence ETF (BOTZ) $1,695
- ROBO Global Robotics and Automation Index ETF (ROBO) $1,265
- iShares Robotics and Artificial Intelligence ETF (IRBO) $175
- First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT) $116
- Direxion Robotics Artificial Intelligence, and Automation ETF (UBOT) $48
As you can see from the above titles, the robotics market isn’t just about hardware, but also the computer vision and machine learning algorithms that make the robots “intelligent.” Software is eating the world, and companies like Bright Machines are now figuring out that handling complexity on the software side is easier than the hardware side. Consequently, we see these thematic ETFs include artificial intelligence and automation alongside robotics.
In past articles, we’ve looked at the differences between these ETFs comparing BOTZ vs. ROBT vs. ROBO or IRBO vs. ROBO. Today, we want to figure out which of these ETFs to buy and hold for the long term. (We’ll be excluding UBOT from this analysis because it is not an investment vehicle, but rather a leveraged ETF that is meant for hedging or speculating.)
In our own tech stock portfolio, we’ve been holding ROBO ever since it became the first robotics ETF to debut. Given there are now five robotics ETFs on the market, we want to make sure we’re invested in the most attractive one. One way we can determine which ETF is best is by following the money. Two of the five ETFs – ROBO and BOTZ – have over $1 billion in AUM, while the combined AUM of the other three ETFs doesn’t even exceed $350 million. If institutional money vetted these five ETFs, and the majority picked ROBO or BOTZ, that’s the direction we’re taking as well.
Do We Buy ROBO or BOTZ?
After sitting down and comparing these two ETFs side by side, we came up with three main reasons to hold BOTZ over ROBO.
More Pure Play
A few years back, we analyzed BOTZ and ROBO alongside the First Trust Nasdaq Artificial Intelligence ETF and pointed out how few stocks these three ETFs have in common.
Here’s another way to look at the above diagram. If all three providers agreed on these 18 core robotics-related stocks, that consensus tells us that these are all pure-play companies we should probably be holding. We also want to minimize extra stocks and just stick with the core stocks everyone agreed upon.
With that in mind, here’s what you get when you buy shares in any of these three ETFs:
- BOTZ – 18 pure-plays + 11 other names
- ROBO – 18 pure-plays + 65 other names
- ROBOT – 18 pure-plays + 77 other names
Because we want pure-play exposure to the robotics theme, we’re not interested in diversity for the sake of diversity. Since BOTZ has all 18 core stocks and only eleven others, it’s far more concentrated, and consequently gives us a higher upside potential (and downside potential). In this case, we’re already more diversified than if we were stock picking, so we prefer a more concentrated ETF.
Fees can have a dramatic impact on total performance over time. According to The Wall Street Journal, the average expense ratio for an ETF is around 0.44%. Here’s how all four ETFs compare on fees:
- BOTZ – 0.68%
- ROBO – 0.95%
- IRBO – 0.47%
- ROBT – 0.65%
Since we’re only interested in BOTZ and ROBO, the lower fee structure on BOTZ is another reason to hold it over ROBO.
The Land of the Rising Sun
If we look at the five robotics themes mentioned earlier, the one with the greatest potential based on the breadth of use cases is industrial robotics. Put another way, whatever ETF we invest in needs to have meaningful exposure to industrial robots.
Late last year, the International Federation of Robotics published a report on global industrial robotics which stated the following (our emphasis in bold):
Japan’s robot sales increased by 21% to about 55,000 units, representing the highest value ever for the country. The average annual growth rate of 17% since 2013 is remarkable for a market with an already highly automated industrial production. Japan is the world´s number one industrial robot manufacturer and delivered 52% of the global supply in 2018.
Whatever ETF we decide to invest in better have some meaningful exposure to the more than 20 Japanese Robot Stocks we’ve looked at in the past. Here’s how much exposure each ETF provides to Japan:
- BOTZ – 42%
- ROBO – 20%
- IRBO – 10.2%
- ROBT – 14.4%
Presently, BOTZ has twice the exposure to Japan as the next biggest name on the list. If Japanese robot companies are growing like mad and command leading market share in industrial robots, we want to make sure we have sufficient exposure.
The BOTZ Top-10
Since BOTZ is such a highly concentrated ETF, the top-10 holdings make up around 63% of the ETF’s total weighting.
Here’s a brief description of what each of these ten companies does:
- NVIDIA (NVDA) – Having now surpassed Intel in size by over $100 billion, NVIDIA is slowly moving from AI chips to “accelerated computing.”
- ABB (ABB) – The world’s largest manufacturer of industrial robots by revenues.
- Intuitive Surgical (ISRG) – An $81 billion manufacturer of surgical robots. Bigger than all other pure-play surgical robotics stocks combined.
- Keyence (6861:JP) – Fabless manufacturing industrial automation company.
- Fanuc (6954:JP) – First in global industrial robot market share for 2019.
- Tecan Group (TECN:SW) – Laboratory automation components and systems.
- Renishaw (RSW:LN) – Advanced metrology and inspection equipment, spectroscopy systems, and computer-aided design and manufacturing system.
- Omron (6645:JP) – Manufactures electronic components, equipment, and systems used for factory automation.
- Brooks Automation (BRKS) – A leading provider of life science sample-based solutions and semiconductor manufacturing solutions.
- SMC Corp (6273:JP) – Specializes in pneumatic control engineering to support industrial automation.
If you’re thinking about picking up some shares in BOTZ, don’t try to time the market. Use dollar-cost-averaging to accumulate your position over time. Don’t panic if the price drops dramatically the next time some unexpected catastrophe strikes. Use that as an opportunity to buy even more shares. We’re in it for the long haul.
Only time will tell which of these five ETFs performs better. If BOTZ underperforms the other four names in the short term, we won’t hang our heads in shame. As active investors, we make informed decisions with conviction, and we hold our positions long enough so that all that disruptive economic value can mature like a fine bottle of Opus One – best enjoyed after a decade or two.
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