Investor interest in artificial intelligence (AI) is surging this year. Just as previously hot segments of tech like social media and e-commerce were losing some of their shine with investors amid a tighter economic environment, consumer-facing AI applications like ChatGPT came along and reignited investor interest in the tech sector.
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Investing in ChatGPT’s creator, privately-held OpenAI, is off-limits to the average investor. However, investors can still gain exposure to the rise of AI. One ETF that investors can use to tap into this growth is the ROBO Global Robotics & Automation Index ETF (NYSEARCA:ROBO).
What is ROBO ETF?
ROBO is an ETF from Robo Global, an index, advisory, and research company. Robo Global focuses on areas like artificial intelligence, robotics, and healthcare technology. This ETF tracks the firm’s ROBO Global Robotics & Automation Index. It seeks to provide investors with returns that correspond with this index, minus fees and expenses.
The aptly-named ROBO is no newcomer to AI. The ETF launched in 2013, and Robo Global says that it was the first robotics and AI ETF. Since inception, ROBO has grown to about $1.3 billion in assets under management (AUM).
Beyond the Hype
Beyond the hype, AI and robotics will be lucrative markets for the winners. Robo Global predicts that the AI market for applications and computing will grow to $410 billion in revenue by 2025, up from just $70 billion in 2020. Similarly, industrial automation is projected to grow to $384 billion by 2025, up from just $158 billion in 2021.
When many people think of artificial intelligence, the first thing that comes to mind is ChatGPT. However, ROBO casts a wide net that goes well beyond this type of consumer-facing artificial intelligence.
Rather than simply investing in large-cap tech stocks like Alphabet and Microsoft, ROBO looks far and wide to provide investors with broad exposure to AI, automation, and robotics across a variety of industries.
Robo Global President and CIO Bill Studebaker stated that the company sees three key growth drivers for the businesses that Robo Global invests in. These areas are “the further ‘robotification’ of manufacturing, automation in high-touch service businesses, and the use of AI in knowledge-based industries.”
The automation of high-touch service businesses and the use of AI in knowledge-based industries could be particularly powerful themes in the near future as companies at different ends of the economic spectrum struggle to attract and retain qualified workers for a variety of reasons. The ETF’s holdings largely fit within these themes.
ROBO’s Top Holdings
Many of ROBO’s top holdings fall within the theme of further automation and “robotification” of manufacturing. Top holdings like Harmonic Drive Systems and IPG Photonics are plays on the automation of the industry.
Harmonic Drive Systems’ products, like sensors, drivers, and controllers, can be found in industrial robots and semiconductor manufacturing equipment. IPG Photonics makes high-end lasers used in manufacturing and material processing.
Zebra Technologies, another holding, makes barcode scanners, RFID readers, and more. These tools help companies streamline manufacturing and distribution and enable them to track the location of inventory in real time. Other top holdings like Rockwell Automation and Teradyne also play into this theme.
Top 10 holding ServiceNow, makes workflow automation software and fits into the idea of increasing AI usage in knowledge-based businesses. As companies struggle to find qualified labor and are forced to rein in expenses, ServiceNow’s offerings should remain attractive to enterprises.
ROBO’s Additional Holdings
The ETF also holds positions in a handful of semiconductor companies. Semiconductors are crucial to providing the computing power that AI solutions need. Nvidia’s chips are crucial to many companies within the AI end market. The semiconductor giant is working with Microsoft to build a “supercomputer” that will manage AI workloads. Nvidia is also building its own large language model, which can be used to train chatbots like ChatGPT.
Other holdings of note include stocks like Intuitive Surgical and Deere. Intuitive Surgical is an $84 billion company that makes cutting-edge robotic surgery systems. These machines enable surgeons to perform minimally invasive procedures with increased precision.
Further, an agricultural machinery powerhouse like Deere may not be the first name that comes to mind when one thinks of AI. Nevertheless, Deere’s products extensively leverage artificial intelligence to help farmers increase their productivity. Deere makes drones that spray crops and scan for weeds, autonomous and semi-autonomous tractors, and autonomous sprayers.
All told, ROBO’s holdings collectively have an average price-to-earnings multiple of 23 (as of December 31, 2022). While this is more expensive than the average multiple for the S&P 500, it isn’t egregiously expensive. ROBO is investing in profitable companies with tangible solutions in the AI and automation space.
A Well-Diversified ETF
The ROBO Global Robotics & Automation ETF is extremely well-diversified. The fund holds 81 positions, with the top ten positions accounting for only 17.8% of assets. The top position, Harmonic Drive Systems, accounts for just 2.3% of holdings. ROBO takes a wide-reaching approach towards investing in artificial intelligence, with investments across different parts of the robotics and automation supply chain spanning 14 countries.
Performance and Expense Ratio
ROBO lost 33% last year as tech and growth stocks sold off. However, as investor interest in AI surges in 2023, ROBO is bouncing back with an impressive 15.6% year-to-date gain.
The fund has a three-year return of 25.4% and a five-year return of 27.1%. Additionally, ROBO has an overall Lipper Rating (a rating system for funds) of 3 out of 5.
One thing investors should be aware of is that ROBO has a relatively high expense ratio of 0.95%.
Investor Takeaway
There are two negatives investors should note when evaluating this ETF. ROBO’s three-year and five-year performances have lagged the broader market, and its expense ratio is relatively high. However, ROBO is off to a strong start this year and looks well-positioned to capture the upside from the growing adoption of artificial intelligence.
The fund is notable for going well beyond the usual large-cap tech suspects when searching for names that give investors exposure to the rise of AI and robotics. ROBO’s well-rounded group of holdings gives investors exposure to growth in AI and automation across many industries and end markets. The fund holds quite a few under-the-radar names that could prove to be diamonds in the rough.
For investors interested in the growing adoption of artificial intelligence and robotics, ROBO looks like a sensible ETF to capitalize on this long-term trend.
