Written by: Richard Lightbound
It seems everyone wants to jump on the robotics bandwagon these days. It’s no surprise. Robotics, automation, and artificial intelligence—or RAAI—includes many of the most exciting companies in today’s universe of emerging technologies. Plus, because this sector is considered a must-have capability in nearly every industry in every corner of the globe, the potential for growth across the robotics supply chain is tremendous.
That doesn’t mean, however, that all robotics investments or investing strategies are created equal. As investment firms and ETF providers race to deliver robotics-focused products, it’s more critical than ever to analyze each approach with vigilance. Follow these five simple rules to explore the pros and cons of each offering and choose an investment strategy that fits your own needs and long-term goals:
1. Select investments that fit within your existing portfolio.
In today’s market environment, diversification is key. And while many investors look to RAAI to provide a new level of diversification, many strategies fail to deliver because they include a short list—sometimes as few as 20 companies—of common large-cap equities. While these companies may be the current market leaders, it’s possible, if not probable, that these companies are already included in your portfolio. Rather than choosing a fund because it’s branded as a “robo” solution, scrutinize each fund to determine if its holdings support low- or no-correlation with common equity benchmarks, and if the holdings create an overweighting of large cap exposures. Look for a broad range of exposures with limited weighting, regardless of the market cap, growth, or momentum of the individual stock.
2. Seek out the largest growth potential.
It’s easy to assume that the biggest names with the largest market caps will deliver the greatest investment returns. However, just as in any emerging industry, the greatest potential for growth in the robotics sector is in emerging technologies that, in many cases, are developed by private or public small- and mid-cap companies. As the “picks and shovels” of the robotics supply chain, these companies deliver the components and capabilities that feed multiple products in multiple geographies across industry sectors. It’s here where the true opportunity for growth exists. Look beyond strategies that focus heavily on large-cap equities with minimal association or purity to RAAI and focus on those that leverage the broader growth opportunity of small and mid-cap companies from around the globe.
3. Look for guidance from robotics experts.
Robotics is a complex, emerging industry. As a result, predicting its direction—and the companies who are best positioned to support that trajectory—requires much more than basic financial analysis. Pursue investment strategies that are based on the guidance of industry experts, academics, and entrepreneurs that offer the knowledge and insight to foresee emerging trends, identify the most promising new technologies, and understand the intricate interaction between technologies and their specific applications. This type of research-driven approach is much more likely to successfully identify players with the strongest prospect for growth and revenue generation and that span the entire universe of robotics, automation, and AI.
4. Look for pure robotics exposure.
Don’t assume that because an index or fund includes the word “robo” that it is delivering the pure exposure to robotics you are seeking. In an attempt to take advantage of the push toward robotics investments, many marketers are choosing to lead with the “robo” branding, but the holdings don’t necessarily reflect the name. To help maximize your exposure to tomorrow’s winners, look for strategies whose holdings include companies that are linked directly to robotics, automation, and AI. The most focused strategies are designed to target companies within each sub-sector of the comprehensive RAAI ecosystem, and to track emerging trends within the space.
5. Keep costs to a minimum.
The robotics landscape is changing at lightning speed. That means that even a passive index will need to be adjusted and rebalanced regularly to continue to capture growth opportunities. In a purely active strategy, such shifts can dramatically increase the volume of transactions to maintain an optimal level of exposure to the right companies at the right time. Rather than taking the financial hit for each trade, consider leveraging a carefully selected portfolio. Doing so allows any necessary rebalancing and reallocation to occur within the wrapping of the fund, which significantly reduces costs to the individual investor. That said, it’s important not to look at cost alone. Make sure you’re getting the value you want by choosing a fund that provides targeted exposure to robotics, automation, and AI and offers a stable performance track record.
As more and more robotics strategies come to market, taking the time to investigate how each solution is designed and structured is critical, but it’s a simple task—as long as you know what to look for.
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