Investing in Robotics? Follow These 5 Simple Rules
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.
An Emerging Theme In Thematic Investing
Exchange traded funds (ETFs) are popular vehicles for market participants looking to engage in thematic investing. Thematic investing looks to take advantage of future growth trends, including disruptive technologies. Given that forward-looking approach, stock-picking in the thematic universe is equally as hard, if not harder, than in traditional market segments.
Go back to the late 1990s, before the bursting of the Internet/technology bubble. Back then, investors stood an equal chance of selecting E-Toys over Amazon or some no longer in existence networking equipment maker over Cisco.
“History is littered with examples of prospering industries with no indication of which company will come to dominate the industry,” according to Nasdaq. “This suggests that successful thematic investing is more about selecting baskets of investments rather than single securities.”1
The ALPS Disruptive Technologies ETF (DTEC) provides basket exposure to a broad swath of thematic investments. DTEC features exposure to not just one or two emerging technologies, but 10 such themes on an equal-weight basis.
The 10 themes represented in DTEC are as follows: 3D printing, clean energy, cloud computing, cybersecurity, data and analytics, fintech, healthcare innovation, Internet of Things (IoT), mobile payments and robotics and artificial intelligence (AI).
Generally speaking, fund issuers have been quick to respond to disruptive and transformative technologies, bringing products to market to tap these themes. Prior to DTEC coming to market late last year, there were ETFs devoted exclusively to cloud computing, cybersecurity, robotics and other themes featured in DTEC. However, few use the basket approach to themes employed by DTEC.
February, a rough month for U.S. stocks, highlighted the advantages of DTEC's multi-theme methodology. Seven of the 10 themes found in the fund finished the month lower, but DTEC was able to outperform the S&P 500 on a monthly basis.
Focusing on individual themes can be rewarding over the long-term, but not all investors have the risk tolerance for such a strategy. Consider this: the Indxx Global Robotics & Artificial Intelligence Thematic Index jumped more than 48% in 2017. That type of performance is enough to seduce many investors, but that same benchmark slipped 7.60% in February, generating monthly volatility of 34.10%.2 Said another way, that robotics and AI index's February slide was more than triple the loss experienced by DTEC during the month.
While it probably is not accurate to call the indexes devoted to individual disruptive themes “old,” many use old school weighting methodologies. For example, the two largest components in the ISE Cloud Computing Index are Netflix, Inc. (NFLX) and Amazon.com Inc. (AMZN). Only two members of the S&P 500 have larger market values than Amazon while Netflix currently has a larger market cap than Wal-Mart (WMT) and McDonald's (MCD).
Holdings subject ot change as of 12/31/17
For its part, DTEC not only equally weights its 10 disruptive themes, but its 100 components as well, potentially reducing single stock risk in the process. As the chart below confirms, equally weighting stocks is rewarding across sectors and market capitalization segments.
Past performance does not guarantee future results
Annualized returns for the past 10 years show seven of the 11 S&P 500 sectors, when equally weighted, outperform cap-weighted equivalents, according to S&P. Three of those seven sectors – financial services, healthcare and technology – are prominent parts of DTEC's roster.
1 Source: Nasdaq Dec. 28, 2015 https://www.nasdaq.com/article/what-thematic-investing-is-and-its-strengths-and-risks-cm559209
2 Source: ETF Replay data
An investor should consider the investment objectives, risks, charges and expenses carefully before investing. To obtain a prospectus which contain this and other information call 866.675.2639 or visit www.alpsfunds.com. Read the prospectus carefully before investing.
An investment in the ALPS Disruptive Technologies ETF (DTEC) may be subject to substantially greater risk and volatility than investments in larger and more mature technology companies.
There is no assurance that the market developments and sector growth based upon the themes discussed in the article will come to pass.
ALPS Disruptive Technologies ETF shares are not individually redeemable. Investors buy and sell shares of the ALPS Disruptive Technologies ETF on a secondary market. Only market makers or “authorized participants” may trade directly with the Fund, typically in blocks of 50,000 shares.
ALPS Advisors, Inc. (AAI) has engaged IRIS Werks, LLC (IRIS) to produce analysis and commentary on ALPS-advised ETFs. IRIS currently has a compensated business relationship with AAI. AAI is not affiliated with IRIS.
The content and opinions expressed in this article are that of the author and not the views and opinions of AAI. In addition, AAI assumes no responsibility to ensure the accuracy of the content written by the author.
There are risks involved with investing in ETFs including the loss of money. Additional information regarding the risks of this investment is available in the prospectus. Past Performance is not indicative of future results.
The fund is new and has limited operating history.
ALPS Portfolio Solutions Distributor, Inc. is the distributor for the ALPS Disruptive Technologies ETF. AAI is affiliated with ALPS Portfolio Solutions Distributor, Inc.
The author is not an investment professional and this article should not be considered investment advice. While the information and statistical data contained herein are based on sources believed to be reliable, the author takes no responsibility to ensure the accuracy of the content. Additionally, this article should not be relied on or be the basis for an investment decision. Information that is historical is not indicative of future results, and subject to change.
S&P 500®: A capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
S&P SmallCap 600®: A capitalization-weighted index that measures the small-cap segment of the U.S. equity market.
S&P MidCap 400®: A capitalization-weighted index that measures the mid-cap segment of the U.S. equity market.
Indxx Global Robotics & Artifical Intelligence Thematic Index: The Indxx Global Robotics & Artificial Intelligence Thematic Index is designed to track the performance of companies listed in developed markets that are expected to benefit from the increased adoption and utilization of robotics and Artificial Intelligence ("AI"), including companies involved in Industrial Robotics and Automation, Non-Industrial Robots, Artificial Intelligence and Unmanned Vehicles.
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