War Of The Robotic ETFs

[This article appears in our July 2019 issue of ETF Report.]

In the last several years, several ETFs have launched that cover the robotics theme. They are all fairly different since this is not a well-defined space, yet they’ve mostly followed a very similar pattern in terms of performance.

Overview
The first fund to enter the robotics space was the ROBO Global Robotics and Automation Index ETF (ROBO) in October 2013. Today it’s a $1.2 billion fund that holds 91 different securities selected from emerging and developed markets.

However, ROBO is not the largest fund in the space—that label goes to the Global X Robotics & Artificial Intelligence ETF (BOTZ), which launched in September 2016 and currently has $1.5 billion in assets. For some time, ROBO and BOTZ were neck and neck in terms of size before BOTZ pulled ahead. It was likely helped by its expense ratio of 0.68% versus the 0.95% charged by ROBO. In a possible drawback, BOTZ has a much more concentrated portfolio of just 34 stocks and only covers developed markets.

But BOTZ also has a leveraged version of itself in the Direxion Daily Robotics, Artificial Intelligence & Automation Index Bull 3X Shares (UBOT)—both track the Indxx Global Robotics & Artificial Intelligence Thematic Index, but UBOT provides three times the returns of the index. UBOT launched in April 2018 and currently has $17 million in assets under management. It charges 1.49% in expense ratio.

The two smaller and more recent launches both rolled out in 2018. The iShares Robotics and Artificial Intelligence ETF (IRBO) debuted in June 2018 and has $32 million in assets. The First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT) rolled out in February 2018 and has $46.6 million in assets. IRBO has 90 different holdings, while ROBT has 91 securities in its portfolio. IRBO is the cheapest of the four nonleveraged ETFs, with an expense ratio of 0.47%, while ROBT charges 0.65%.

Strategy
ROBO tracks an in-house index from ROBO Global that targets stocks at the global level that are involved in the automation and robotics industries. The underlying index implements a proprietary weighting methodology. An index committee plays a significant role in determining which stocks qualify for inclusion.

Meanwhile, BOTZ focuses on companies from developed markets involved in the production and development of robotics and artificial intelligence (AI), and is based on an index that uses market capitalization to select and weight its components. Companies must derive a significant amount of their revenue from activities related to robotics and AI, or they must have a “stated business purpose” in that area to be eligible for inclusion.

IRBO’s underlying index uses market capitalization to select components, but equal weights them. The NYSE FactSet Global Robotics and Artificial Intelligence Index takes a global approach, and relies on filings and public disclosures to determine which companies are eligible for inclusion.

Companies are selected from 22 different FactSet Revere Business Industry Classification System subindustries that offer exposure to robotics and AI, and must derive at least half of their revenue from robotics or AI, hold a 20% market share or have $1 billion in revenue from one of those subindustries.

RBOT has perhaps the most complicated methodology. Like IRBO, it focuses on both AI and robotics at the global level. Its methodology classifies companies as enablers, engagers or enhancers, with each group receiving a specific fixed weighting at each rebalancing, with companies equally weighted in the three categories. Each category includes 30 companies.

Holdings
The holdings of the four ETFs are very different, with little overlap in their top 10 components, except for ROBO and BOTZ: Both of those ETFs hold OMRON Corp., Keyence Corp., FANUC Corp., and NVIDIA Corp. in common, though at very different weights.

Perhaps more importantly, each of the four ETFs have the same top three sectors: industrials, technology and health care. ROBO and BOTZ, for example, have industrials as their largest sector, weighting it at roughly 55% and 69%, respectively. Meanwhile, ROBT’s and IRBO’s largest sector is technology, with respective weights of roughly 56% and 67%.

And each fund has the U.S. and Japan as their top two countries by weighting. BOTZ is the only fund in the group weighting Japan as its largest country, at roughly half of the index, with the U.S. at less than 30%. BOTZ is also the only fund in the group that doesn’t include emerging market securities in its selection universe. That means countries like Taiwan and China have no influence in the index, while the other three funds include at least one of those countries in their top 10 countries.

Trading & Performance
The most liquid of the funds is BOTZ, with a spread of 0.05% and an average daily dollar volume of $15.3 million. IRBO, the newest fund, is also the smallest and least liquid, with a spread of 0.21% and an average daily dollar volume of $0.5 million.

However, ROBO, despite reasonable liquidity, has been having a rough year in 2019. It’s the only fund in the group to see outflows, and is the worst year-to-date performer. It had lost $71 million to outflows as of late May, and was trailing the other funds in the group, with an increase of just 12.35%.

Meanwhile, ROBT, despite being the second least liquid fund in the category, was up more than 22%, leading the group, and had received the most year-to-date inflows, at $21.3 million. It was also the best performer during the 12-month period, up more than 5%, while BOTZ was the worst performer, with a decline of 17%.

Final Thoughts
While ROBO is the most established fund in the space, it has been ceding ground to one of its competitors. And that competitor is not BOTZ, its neck-and-neck rival for so long in terms of assets, but the relative newcomer ROBT.

ROBT remains small, at less than $50 million in AUM, and a bit less liquid than the larger funds in the space, but between its strong performance over the last 12 months and its inflows versus ROBO’s outflows year to date, its star is clearly rising.