VettaFi Voices On: AI, Robotics, & Opportunities

Zeno Mercer, senior research analyst at ROBO Global Indexes, a VettaFi business: Robotics and automation are already disrupting nearly every industry in every geography. Still in its infancy, this multi-decade technological transition creates a unique opportunity for investors looking to capture the tremendous growth coming for robotics companies globally. We’re entering a 24/7 economy that requires steadfast automation to meet the growing expectations of consumers and enterprises. Digital online experiences and the behind-the-scenes of supply chains and infrastructure will continue to need this industry. There is no reversion of this trend, and we expect its adoption to continue to accelerate due to competitive forces, safety requirements, and the goal of sustainable autonomy for countries around the globe.

Todd Rosenbluth, director of ETF research: I’m going to focus more on the ETFs tied to robotics and artificial intelligence (AI) than the themes themselves. The recent BBH global ETF survey is very supportive of the further growth of the theme. When asked, “Which thematic strategies do you plan to add to your portfolio in 2023?” 56% of global investors and 58% of U.S. investors chose robotics and AI, second only to internet/technology and ahead of other popular themes like digital assets, healthcare, and autonomous and electric vehicles. Meanwhile, more broadly, 38% of U.S. investors plan to increase exposure to thematic ETFs this year compared to 8% that plan to decrease. Many others plan to stay the same or do not invest in these funds.

VettaFi recently hosted a webcast on thematic investing and found that 32% of advisor attendees had a small slice allocated to thematic growth strategies (32%), while an additional 13% had more than 5% allocated. The remainder of attendees did not have any exposure but came to learn it is still early innings in the education about what the drivers are for a theme like robotics and AI and what makes ETFs like the ROBO Global Robotics & Automation Index ETF (ROBO B-) which now tracks an index that is part of the VettaFi family and funds like the Global X Robotics & Artificial Intelligence ETF (BOTZ B) and the First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT B+).

I tried to cover this here, but what’s inside BOTZ is very different than ROBO despite them focusing on the same theme and having more than $1 billion in assets. For example, BOTZ has 7%+ stakes in 5 different companies led by NVIDIA (NVDA), while ROBO’s top holding has just 2% of assets. Different holdings and weightings approach result in a different performance record. Many investors will focus on the fees for a thematic ETF, but what’s inside is the driver.

I previously mentioned survey and sentiment data from VettaFi and BBH, but there’s growing demand when we look at the flows. Robotics ETFs pulled in $107 million in March, per a Global X report, while other disruptive technology mega themes like connectivity, fintech, and mobility experienced net outflows.

For those that like an audio version on this topic, our colleague Tom Hendrickson was on ETF Prime this week with Nate Geraci and talked about thematics.

Roxanna Islam, associate director of research: I like this topic a lot because many people don’t realize how far we’ve come with robotics and automation. If you look at warehouse operations, it has evolved significantly over the years. Instead of barcode scanning, warehouses will now use RFID scanning, which is more accurate, faster, and doesn’t require a direct line of sight scanning by a human. Now we’re seeing warehouses use picking robots which can reduce errors and human injury. These are big steps for efficiency and productivity (especially in places with high employee turnover) and can contribute to higher margins. This is really important not just for warehousing companies but also for retailers who are now typically expected to get products to customers in a day or less. There are also a few other areas within logistics where people have attempted to use robotics/automation, but it hasn’t hit the target yet. These areas interest me the most because I think they have the most potential.

Rosenbluth: VanEck launched a robotics ETF recently, making it more fun for us research folks to compare and contrast the offerings. They have a strong thematic suite. And, of course, there’s the actively managed ARK Autonomous Technology & Robotics ETF (ARKQ B) and an index-based iShares ETF, the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO B+), that also provide robotics exposure. Advisors have lots of choices to consider.

Islam: The first area is last-mile delivery — which is basically a delivery from the local warehouse to the customer (like when you receive an Amazon package locally) but can also include food, grocery, and pharmaceutical deliveries. This is a really important area because of e-commerce and the penetration of app-based delivery services like Uber Eats, DoorDash (DASH), GoPuff, etc. It’s obviously difficult for large trucks to drive through neighborhoods — especially through city streets — because of fuel efficiency issues, narrow streets, parking, etc. So many companies currently use vans or even cars for app-based delivery services, but interestingly, some companies have attempted to use autonomous sidewalk robots. Companies like Amazon (AMZN) and FedEx (FDX), along with many other start-ups, have been experimenting with this, and there are some issues, like if a human tries to intervene or if the robot gets stuck. But they’ve been relatively successful in closed-off campuses like colleges and large corporate areas. I think there could be some good use cases for this. They’ve also been testing package delivery drones, and these have run into some similar issues, but I think the area that has the most potential for expansion is delivering medicine or packages to rural areas.

This also sort of aligns with autonomous vehicles (I did a high-level overview in this note here). There’s been a lot of progress in getting newer commercial vehicles into the lower levels of autonomy. However, there’s still so much updating among smaller carriers, so I think that’s a huge potential growth area. The trucking industry is extremely fragmented, and 95.7% of motor carriers have fleets of less than ten trucks, while 99.7% operate less than 100 trucks. So that’s a lot of the industry that isn’t part of a big corporation that still needs to refresh their fleet — many of these will probably buy used trucks, so it may take longer for them to adapt. That means there’s a lot of opportunity in the future.

Rosenbluth: Roxanna is making a great case for how robotics and automation is a diverse theme. The index behind ROBO, for example, has 11 sub-sectors that include healthcare, food, and agriculture, not just manufacturing and logistics.

Islam: Yes. And the agriculture industry seems to have a lot of parallels with the warehousing industry as well. There’s already been a lot of progress with using sensors to monitor fields and robots to pick crops, so it’s really interesting how robotics and AI can make these physically demanding and repetitive tasks simpler and safer for humans. It also helps these companies with productivity, ultimately leading to higher margins. And it helps the global demand for food production.

From an investor perspective, I think it’s an exciting area because of all the cool growth opportunities we discussed above. But it’s difficult to execute because there are a lot of newer or foreign companies, and it’s just overall difficult to stock pick because people aren’t familiar with many of the firms. I like ETFs for that reason. And looking at ROBO right now, there are not many household names besides NVIDIA (NVDA), Qualcomm (QCOM), and a few others. I like that it’s not a lot of overlap with the large-cap tech ETFs. When looking at investing in ETFs — especially thematic ones — it’s sometimes difficult not to get the same MAANG exposure over and over again.

Rosenbluth: I don’t have the thematic expertise Zeno and Roxanna have, but yes, having robotics do the tasks that make life better for humans and ensure continuity during times of chaos, like when the COVID-19 pandemic first hit, sounds wonderful to me. And yes, Roxanna, it is harder to find thematic ETFs without the MAANG dominating, but that’s also occurring in BOTZ. I mentioned hefty weights in a few stocks, including (ABB), Fanuc (FANUY), Keyence (KYCCF), and Intuitive Surgical (ISRG).

Islam: I am not very familiar with any of those stocks, so that supports my statement about how this is a problematic area to stock pick in for generalist investors/advisors because of the lack of household names! This is why ETFs make a lot of sense in this industry.

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