AI - ROBO Vs. BOTZ: A Comparison Of The 2 AI ETFs

2023-10-11 15:03:11 ET

Summary

• Both ROBO and BOTZ provide diversification and exposure to the AI market but differ in their holdings and concentration.
• While both ETFs have underperformed the broader technology market, BOTZ's focus on high-growth stocks like NVIDIA drove its performance.
• Both ETFs face risks stemming from high valuations, although BOTZ faces more risks, including higher volatility, as it has a more concentrated portfolio.

Overview

Artificial Intelligence ((AI)) is undoubtedly one of the most transformative technologies of our time, revolutionizing various industries and reshaping the way we live and work. This article explores how investors can tap into this trend by investing in AI-themed Exchange-Traded Funds (ETFs). Thus, I will compare and contrast two prominent AI ETFs, the Robo Global Robotics and Automation Index ETF ( ROBO ), and Global X Robotics & Artificial Intelligence ETF ( BOTZ ) to help investors decide which one may be the more attractive option for capitalizing on the AI market.

Global Robotics and Automation Index ETF (ROBO ETF) is issued by ETF Managers Group. ROBO is an exchange-traded fund designed to provide investors with exposure to companies at the forefront of the robotics, automation, and AI industry. ROBO tracks the ROBO Global Robotics and Automation Index. It has a relatively high expense ratio of 0.95%, representing the annual costs when investing in the ETF. Its current assets under management ((AUM)) are $1.26 billion.

The Global X Robotics & Artificial Intelligence ETF (BOTZ ETF) is issued by Global X Management and is an exchange-traded fund designed to provide investors with exposure to companies leading the way in the robotics and AI industry. It concentrates on companies actively involved in the development and application of robotics and AI technologies. These companies operate across diverse sectors, such as manufacturing, healthcare, and autonomous vehicles. BOTZ tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index. Compared to ROBO, BOTZ has a cheaper expense ratio of 0.69% annually, which is probably due to its nature of investing in higher volume stocks, meaning that the trading expenses are likely to be lower. It currently manages $2.1 billion in assets.

Holdings

ROBO ETF

As of the latest, the top 10 holdings of ROBO account for approximately 17% of its total assets. The remaining holdings, which consist of various other companies, make up the majority of the fund, totaling 83%. This indicates that the ETF is well-diversified, with a significant portion of its investments spread across a broad range of companies beyond its top 10 holdings. In total, ROBO currently holds 80 stocks with an average weighted market cap of $44 billion.

ROBO exhibits a well-diversified portfolio across various countries. The United States holds the highest concentration at 48.55%, followed by Japan with 19.36%, and Germany at 7.13%. These top three countries make up the majority of the ETF's geographical allocations. Additionally, the fund allocates smaller portions to several other countries, including Taiwan, Switzerland, the United Kingdom, Sweden, France, Canada, and Norway.

Intuitive Surgical (ISRG): The renowned American technology company specializes in robotic-assisted surgical systems. The company is a leader in the field of minimally invasive surgical solutions. The company is best known for its da Vinci Surgical System, a robotic platform that enables surgeons to perform complex procedures with precision through small incisions. Its Q2 earnings underlined continued growth in demand for its surgical systems, with revenue growing 15% year-over-year (YoY) to $1.76 billion, while net income attributable to Intuitive was $507 million, compared with $415 million in the second quarter of 2022. Shares are trading 60% higher from last year.

Airtac International Group: Airtac International Group is a prominent industrial automation company headquartered in Taiwan. Airtac specializes in producing a wide range of products, including pneumatic cylinders, valves, air preparation units, and other automation components used in various industries like manufacturing, automation, and machinery. As Airtac maintained revenue growth guidance at teens with operating margins greater than 30%, shares are trading 40% higher YoY.

Kardex Holding (KRDXF): Kardex Holding, headquartered in Zurich, Switzerland, is a global leader in providing innovative storage and retrieval solutions for various industries, including manufacturing, distribution, and logistics. The company offers a range of automated systems designed to optimize inventory management, increase storage capacity, and improve overall operational efficiency. As bookings increased 10% in the first half of 2023 and EBITDA jumped 14%, shares are up nearly 50% YoY.

BOTZ ETF

In contrast to ROBO, which maintains a more diversified portfolio, BOTZ exhibits a larger concentration of its assets. BOTZ allocates approximately 67% of its total assets to its top 10 holdings, while the remaining 33% is spread across various other companies. In total, BOTZ currently has 44 holdings with an average market cap of $214 billion, underlining its concentration on large caps.

NVIDIA Corporation ( NVDA ): Nvidia is a pioneering technology company that has emerged as a leader in the AI revolution. Nvidia has become renowned for its cutting-edge graphics processing units (GPUs) that are not only vital for high-performance gaming but have also found widespread use in AI and deep learning applications. In recent quarters, the company saw unprecedented demand for its chips, with revenue soaring over 100% YoY, while net income jumped to $6.2 billion, up from $2 billion last year. Unsurprisingly, shares are up nearly 300% YoY.

ABB Ltd ( ABBNY ): ABB (Asea Brown Boveri) is a globally recognized multinational corporation headquartered in Zurich, Switzerland. ABB is a leading technology company specializing in industrial automation, robotics, electrification, and power grid solutions. In 2022, revenues stood at $29.4 billion, marking a 2% annual increase, with a strong net income margin of 11%. Shares are trading 30% higher from last year.

Keyence Corporation ( KYCCF ): Keyence Corporation, headquartered in Japan, is a prominent global technology company specializing in the development and manufacturing of automation and inspection equipment. Keyence has risen to prominence as a leader in providing high-precision sensors, machine vision systems, barcode readers, and other automation solutions. As global demand for automation technology continues to grow, Keyence has more than doubled its revenues over the past decade to nearly $7 billion in 2022. The company also holds industry-leading profit margins of 55%.

Performance

Both ROBO and BOTZ have underperformed the broader technology market ( QQQ ), though only ROBO significantly underperformed. In this regard, the Nasdaq Index returned 38% in one year, while BOTZ and ROBO returned 36% and 20%, respectively. This is largely because of QQQ and BOTZ's emphasis on large caps such as NVIDIA, which surged over the past year. Since BOTZ has a high concentration on its top 10 holdings, it is also more volatile, as seen by large price swings over the past year. Therefore, if the broader market experiences a correction, BOTZ is likely to underperform ROBO, as it is more concentrated on a few stocks. Furthermore, if NVIDIA falls, BOTZ will drop in accordance due to its significant weight (15%).

ROBO also underperformed iShares Robotics and Artificial Intelligence Multisector ETF ( IRBO ), which also has exposure to companies involved in the robotics and artificial intelligence sectors across various industries. Similarly, IRBO is quite diversified in terms of holdings with over 110 stocks in total. It has an expense ratio of just 0.47%. The divergence in performance is simply due to a different rotation strategy, as the two ETFs had a very similar return for most of the past year.

Valuations

As expected, the holdings of the two thematic growth ETFs are not trading cheap, based on traditional valuation metrics. Here, BOTZ's largest two holdings, NVIDIA and Intuitive Surgical, trade at P/E ratios of 110x and 80x, respectively. However, its third largest holding, ABB trades at just 20 times earnings. It should be noted, however, that both NVIDIA and Intuitive Surgical have higher earnings growth rates, and thus trade at 43 and 52 times forward earnings. Overall, the average P/E ratio for the holdings in BOTZ is 79.77. This compares to the S&P 500, with an average P/E ratio of just 25x.

Furthermore, the ETF has a distribution yield of 0.22%, which represents the income generated by the ETF's holdings and distributed to investors in the form of dividends or interest payments.

In comparison, stocks of the more diversified ROBO trade at lower valuations. Here, Airtac trades at a P/E ratio of 34x, while Kardex trades at a P/E ratio of 28x. Overall, the average price-to-earnings (P/E) ratio for the holdings in the ROBO portfolio is 41.24, which is comparably lower than BOTZ. ROBO also has a slightly higher yield of 0.27%.

Takeaways

Both ROBO and BOTZ present an enticing investment opportunity to tap into the rapidly evolving AI market, which has the potential to surpass the $2 trillion milestone by 2030. Both of these ETFs provide diversification by incorporating various holdings from different countries, and they are regularly reviewed and adjusted in response to market developments.

Since ROBO offers a higher level of diversification, it may be better suited for risk-averse investors, as BOTZ is more concentrated on high-growth players like NVIDIA, which are trading at relatively expensive valuations. Investors may also choose to simply invest in the broader technology index ((QQQ)), which has a low expense ratio of just 0.2%, with similar exposure to NVIDIA and other AI players.

Nevertheless, investing in AI-themed ETFs presents certain risks. The AI sector is known for its volatility, driven by rapid advancements, changing regulations, and market sentiment. Regulatory changes and geopolitical conflicts can also affect the AI sector's performance. Additionally, it's important to note that valuations of AI stocks could decline if the expected growth in the sector does not materialize as anticipated, impacting the ETF's performance.

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