It’s without question that some of the most exciting (and profitable) investment opportunities in the last decade have been in the technology sector as our society has advanced digitally by leaps and bounds. When it comes to accessing technology stocks today, ETFs offer a plethora of ways to gain cheap, diversified exposure to the sector; furthermore, the ongoing growth of the ETF universe has spawned a number of industry-specific funds, allowing for investors to truly hone in on a particular theme [see 101 ETF Lessons Every Financial Advisor Should Learn].
Frank Tobe, Co-Founder of ROBO-STOX LLC and Editor of The Robot Report, recently took time to discuss with us the newly launched ROBO-STOX Global Robotics and Automation Index ETF, a first-to-market fund offering exposure to what is arguably one of the most lucrative corners of the technology market.
ETF Database (ETFdb): What was the inspiration behind creating the ROBO-STOX Global Robotics and Automation Index ETF (ROBO)?
Frank Tobe (FT): We wanted to give investors an opportunity to capitalize on the ongoing growth of the worldwide robotics and automation sector. Prior to the launch of our ETF, there was no benchmark for investors to use when gauging investments in this industry.
We created the ROBO-STOX Global Robotics and Automation Index, which the ETF tracks, to give investors access to the most promising long-term robotics companies. The index finds the robotics stocks with the best long-term value potential, and investors can harness the growth of the companies in the index through our ETF.
The original inspiration was mine: I thought that robotics and automation was the next big thing. I’ve been tracking the industry for years but was joined last year by Rob Wilson, ROBO-STOX Co-Founder and CEO, who converted my database and expertise into a workable financial product: the index that underlies the ETF.
ETFdb: Broadly speaking, where do you view the robotics industry right now in terms of the technology adoption life cycle as a whole?
FT: The industry has reached a tipping point. The adoption of, and demand for, robots continues to accelerate in several areas of the global economy: automobile and general manufacturing; military/defense and search-and-rescue; service robots involved in healthcare; and soon, agriculture. Some very innovative robots for use in these sectors are presently in the research-and-development phase.
For example, the U.S. Defense Department’s Defense Advanced Research Projects Agency (DARPA) is trying to develop robots with two arms and hands that can unzip duffle bags and luggage, search them for illegal or hazardous items, and zip them back up. This is a labor-saving activity that can help with airport security, but think about the impact that robots with two arms and flexible hands can have on manufacturing!
Robots as sophisticated as this are still in development, but they will likely be deployed into the marketplace within three to 10 years. Some robots already available for purchase have come down in price to the point where small and medium enterprises–businesses or factories with less than 500 employees–can afford to buy and integrate them.
ETFdb: What is the objective of the ROBO ETF, and how does it actually work?
FT: The objective of our ETF is to deliver returns that reflect those of the global robotics and automation industry by investing in the companies included in the ROBO-STOX Global Robotics and Automation Index.
The index consists of 78 U.S. and international companies from the robotics and automation sector that meet listing criteria for the S&P DJI Global Broad Market Index and also have a market value of at least $200 million. Pure-play robotics companies are rare, and some firms are more purely related to robotics and automation than others, so the ROBO-STOX Index Committee classifies the index’s companies in two different ways.
“Bellwether stocks” are firms that the committee believes reflect the overall performance of the robotics and automation space, and “non-bellwether stocks” are firms that are not as purely related to robotics and automation, but still are likely to grow their revenue over the long term. The index is rebalanced every quarter, with bellwether stocks usually weighted at 40 percent and non-bellwether stocks generally weighted at 60 percent. We have the flexibility to delete companies from the index at any time.
ETFdb: What positive catalysts, if any, do you see on the horizon that could continue to fuel the rally in the robotics and automation space? What are some of the risks associated with this corner of the market?
FT: In addition to the price reductions of available robots, which I mentioned earlier, there is a great deal of enthusiasm around the robots being deployed in the medical profession because they indicate that robots can perform more sophisticated tasks. These robots actually assist doctors with surgical procedures — but unlike the robots being deployed in manufacturing, hospitality and agriculture, these robots augment the skills of surgeons and otherwise assist surgeons and operating room personnel [see also High Tech ETFdb Portfolio].
According to the International Federation of Robotics, the U.S. had nearly 150 multipurpose industrial robots per 10,000 manufacturing employees in 2012, while South Korea, Japan and Germany had the highest robot-to-employee densities. At that time, there was a global average of 58 multipurpose industrial robots per 10,000 manufacturing employees, but this figure is expected to increase as more robots are deployed to take over dirty, dangerous and repetitive jobs, especially in manufacturing.
In addition, global companies are allocating more resources toward the production and development of robots. For example, Google created a robotics division, and acquired eight companies to build that business, last year. Just the other day Foxconn and Google announced a “cooperation” to develop robots for Foxconn’s use and also for Google’s use. Apple announced in 2013 that it would invest $11 billion in robotics and automation, and Amazon.com CEO Jeff Bezos created a media storm this past December, when he said during a 60 Minutes interview that his company–which acquired robotics firm Kiva Systems in 2012–would soon be using automated drones to deliver packages.
On the downside, one of the major risks associated with robotics and automation is that two-thirds of the sector is tied to manufacturing. As a result, two-thirds of the industry is subject to conditions of the general economy, and long-term investments in robotics are put on hold during economic downturns. However, the positive economic news coming out of markets around the world, especially India and China, makes me optimistic about the robotics industry going forward.
ETFdb: How might ROBO fit into a portfolio? Would you consider this as a core, or more tactical, holding?
FT: The ETF can work well as part of a balanced equity portfolio favoring emerging business trends and emerging markets. The ROBO ETF is not a high-risk investment product because it is well-balanced and a great deal of fundamental research goes into its stock selection. Therefore, we think of it as a conservative play within a diversified equity portfolio.
As a semi-retired person myself, I have a balanced overall portfolio with a 40 percent allocation to equities and a 60 percent allocation to bonds. Within the equity portion of my portfolio, I prefer to focus on emerging trends, such as robotics. My investment in the ROBO ETF accounts for 5 percent of my portfolio, which I consider a core holding. I sold the riskier robotics stocks in my portfolio and replaced them with ROBO.
This is why we created the ROBO ETF and index to begin with — so investors can have a reliable benchmark by which to judge the riskiness of robotics investments.The Bottom Line
Investors today can slice-and-dice the technology sector in previously unimaginable ways; whether it’s Internet, Social Media, or Cloud Computing stocks you are trying to access, there’s likely an ETF out there that fits the bill. The recently launched ROBO ETF warrants a closer look from anyone who wishes to gain exposure to the lucrative robotics and automation industry, but is looking to avoid the nuances and risks that are associated with investing in the space on a company-by-company basis.
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Disclosure: No positions at time of writing.