OMRNF - BOTZ: Embracing The Rise Of The Machines

2023-05-14 05:27:45 ET

Summary

• Robotics and AI are not just buzzwords companies use to attract investors' attention.
• This fund has a unique approach compared to other robotics funds because it invests directly into robotics companies, which means it invests heavily in Japan.
• The valuation is higher than ideal, but the fund is still worth a look.

These days words like "AI", "robotics", and "machine learning" are thrown around generously by executives of many companies in order to attract the attention of investors, but these are more than merely buzzwords. Today, from healthcare to farming, from manufacturing to transportation, artificial intelligence, and robotics are about to revolutionize the way we do things both at work and outside work.

Investors who would like to take advantage of this new trend can either pick their own stocks or examine one of the specialized ETFs that specifically focus on the topic. One of those specialized ETFs is Global X Robotics & Artificial Intelligence ETF ( BOTZ ) and this article will talk about this ETF in detail.

The ETF currently holds a basket of 44 stocks, and the top 10 holdings account for 65% of the ETFs weight. Interestingly enough, 5 out of the top 10 holdings of this ETF are Japanese, which doesn't surprise me considering how Japan has been making sizeable investments in the field of robotics due to its aging population.

These five Japanese companies are Keyence Corporation ( KYCCF ), Fanuc Corporation ( FANUY ), Omron Corporation ( OMRNY ), Yaskawa Electric Corporation ( YASKY ), and SMC Corporation ( SMCAY ). None of these stocks trade directly in American exchanges, but it is possible to buy their shares in pink sheets. Keep in mind that these stocks will have very low liquidity and very large bid-ask spreads, so it might be tricky to try to replicate this ETF on your own.

Most people outside of Japan probably never heard of these companies, but these 5 Japanese companies make up almost 30% of the ETF's total weight, so it's worth examining them in order to understand the ETF better.

Keyence Corporation has been working on automation and robotics solutions since the 1970s. The company produces custom solutions that specifically meet the needs of its customers in a variety of sectors, including manufacturing. As a matter of fact, many car companies use this company's robots in their factories in order to increase their efficiency. The company's robots not only build things but also inspect things built by others using their sensors, machine vision systems, laser markets, and other measuring instruments. This company is actually a conglomerate, and it owns 16 companies specializing in all aspects of robotics.

The company enjoys a market cap of almost $120 billion. It generates about $2 billion in annual profits, so one could say that its price to earnings multiple is very generous. In the last decade, the company's profits rose 243% while its market cap grew twice as fast.

Enjoying a market cap of $32 billion, Fanuc Corporation is another Japanese company that's weighted heavily in this ETF. By sales figures, Fanuc is the largest industrial robotics company in the world. It was founded in 1955 as a subsidiary of Fujitsu, and it's been growing since then. The company offers a variety of robotic products and services which wide greatly in scope and size. For example, it can build a whole system of networks that govern all aspects of production in a factory (basically a robotic production infrastructure) or it can sell robots that operate independently in an existing production environment depending on its customers' preferences and budget. Fanuc has a large office in Michigan, where the company helps many manufacturing companies (including car and truck factories) incorporate robotics into their production.

Omron is much smaller than these companies with a market cap of $11 billion, but it still has as much weight as the previous two in the ETF, which tells us that the companies in the ETF aren't exactly weighted by their market cap. This company produces a wide variety of products including automated traffic control systems, automated packaging systems, and many robotic solutions in infrastructure, pharmaceutical, and healthcare sectors. It also has a consumer arm where it produces robotic and AI solutions for home electronics and home appliances, so even though this company is much smaller than the previous two, it covers almost as much area as they do.

Yaskawa Electric Corporation produces more specialized robots that can do more advanced tasks such as painting, welding, packaging, assembly, material handling, and interacting with other robots. Last but not least, SMC Corporation specializes in pneumatic equipment (machines that can generate mechanical motion by controlling and manipulating air pressure) and the company claims 40% of global market share.

These are the Japanese companies that have been heavily invested in robotics, automation, and AI for anywhere from 30 to 60 years, so you can be sure that they are heavily involved in this business and do not simply see it as a buzzword to attract investors' attention.

The fund also features many American companies, 2 of which claim almost 20% of its total weight. These are Nvidia ( NVDA ) and Intuitive Surgical ( ISRG ), the company that builds robots that can do surgeries, which can be scary to some people. Of these companies, Nvidia enjoys a P/E of almost 100 and Intuitive Surgical has a P/E multiple of 60. As you can see, this fund doesn't have many stocks one would consider "cheap" based on traditional metrics.

The average market cap of companies in this ETF is 77 billion and the average P/E is 40.

This fund's choice of companies certainly makes it unique. There are several other robotics and AI funds out there, but many of them don't directly invest in robotics firms the way this fund does. For example, ARK's popular ETF focusing on robotics & AI ( ARKQ ) has a completely different approach than this fund. Some of ARKQ's largest holdings include Tesla (a car manufacturer), Deere (a heavy machinery manufacturer), and Kratos Defense & Security Solutions (a defense contractor). While these companies all utilize robotics and AI in their production, they are more like customers of robotics and AI, unlike Keyence, Fanuc, or Omron whose main business is to design and produce robotic systems.

Since the fund invests in very specialized companies in a narrow field, you would expect to see very limited turnover in the fund, but it actually has a relatively high turnover. In the last 12 months, the fund's turnover rate was 29%. For those that don't know, the turnover rate of a fund refers to how often the fund enters and exits positions. A turnover rate of 0% would mean that the fund never adds or removes any companies (rare even for index funds since indices can change over time) and a turnover rate of 100% would mean that the fund changes its holdings completely every year (very rare). Most funds have turnover ratios around 10-20%, but specialized funds typically have less turnover since they have a limited pool of stocks they can choose from, which is why I was surprised to see that this fund has such a high turnover rate.

After seeing the high turnover ratio, you might also think that this is an actively managed fund, but that's not the case either. The fund actually tries to track (as closely as possible) the Global Robotics & Artificial Intelligence Thematic Index. As you can tell, the index itself is highly dynamic, which makes the fund more dynamic than your typical index fund.

Since I mentioned how the fund has a lot of foreign stocks, including several Japanese stocks, I must also mention the aspect of currency risk. When you buy this fund you are also betting on the Japanese Yen, but I am not too worried about it since this is one of the most stable currencies in the world today.

So, let's talk performance. After all, people invest their money into stocks and funds to generate returns and there is no point in investing if there are no returns associated with it (unless you are trying to make a statement).

Since its inception in 2020, the fund returned 24% to investors. This compares rather poorly against other robotics & AI funds. For example, ARK's fund returned 42% despite its poor performance since 2021 (notice that it was up more than 160% at one point). I blame part of BOTZ's underperformance on its heavy reliance on foreign stocks.

Interestingly enough, if you zoom into the chart and shift your focus on just the last 1-year period, this fund outperformed its peers. BOTZ returned 20% while ROBO returned 15% and ARKQ had a negative return. AIO was barely positive during this period, much of which coincided with last year's bear market.

Maybe things are turning around for this fund, and it will have a better performance moving forward. One thing for is sure, it seems to be less volatile than other robotics/AI funds, which a lot of investors prefer in order to sleep better at night.

Final verdict

There is no harm in buying a small position in this fund (preferably in a retirement account) if you promise to have a long-term vision and not sell at the first sign of weakness. Investors with long-term focus and patience will probably find a lot of value in this fund as robotics and AI continue to revolutionize the way we live, work, learn and interact with the world.

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