One of the most appealing features of ETFs is that they offer an investor easy access to a diverse array of asset classes and market sectors, including highly specialised, thematically defined exposures.
The ROBO-STOX Global Robotics and Automation GO UCITS ETF (ROBO), recently launched by ETF Securities, certainly falls into the latter category. The fund, the first European ETF offering access to the robotics and automation sector, synthetically tracks 82 robotics companies listed globally. A sister-fund was launched last year in the US and is currently trading with around $100 million of assets under management.
The ROBO-STOX Index is made up of companies that derive all or a material proportion of their revenues from the manufacture of robotic or automation products and related services. It is designed to capture companies throughout the production value chain, which includes not just the manufacture of physical robots but also the software and technology that enable the automation.
Although this exposure can be described as niche, 45% of stocks included are classed as large cap, such as Siemens, SMC or Northrop Grumman. The remaining index weight is evenly distributed between small and medium cap stocks. While examining country specific exposure we can also see that US and Japanese stocks are strongly represented, together making up more than two thirds of index weight.
It is thought that the rise of the internet age, rapid advances in technology such as machine vision, motion sensors and image and voice recognition are catalysts for growth in the robotics sector. And this, according to ETF Securities, widens the robotics application to an array of industries such as manufacturing, services, healthcare and exploration.
This said, despite the potential of growth across sectors, as of writing, almost half of the index is concentrated in the industrials sector. This is because mass-production assembly-line driven businesses, specifically those in the automotive sector currently dominate global demand for automation and robotic products. For this reason, investors should check existing exposure to the industrials before investing to avoid inadvertently overweighting the sector.
The success or failure of this sector is likely to revolve around the changing dynamic between the price labour and the cost of automation. A situation in which labour costs rise and/or technological improvements continue to expand the potential application of robotics and drive down the cost of automation will to be supportive of this view.
For example, should the populations of major manufacturing nations such as Japan, Korea and Germany continue to age, a shrinking workforce will decrease supply of labour, driving up its cost and making widespread automation an increasingly attractive option.
Although the underlying investment rationale may appear robust, access to the sector comes at a price. The fund charges a management fee of 0.95%, which when added to the swap fee of 0.45% brings the annual cost of holding the fund to an eye-watering 1.35%. It is therefore recommended that only investors with a strong conviction in the sustained outperformance of this sector should consider this fund.
Alternative Options for Technology Investors
Investors should also check that considerably cheaper ETFs offering exposure to the wider industrials and information technology sectors, which together hold around 80% of the ROBO-STOX index, do not offer an acceptable substitute.
For example, a combination of the Lyxor MSCI World industrials (TNOW) and MSCI World Information Technology (INDW) ETFs, both with TER of 0.40%, despite offering exposure to only a quarter of the same stocks as the ROBO-STOX index, may provide a suitable, albeit indirect, alternative. This is because a combined investment in the two funds would offer exposure to the same broad, structural economic drivers such as an increased role of technology in all sectors, and in particular the industrial sector.
Given their narrow focus, thematic ETFs suffer from significant sector risk therefore are most appropriately deployed as a strategic enhancement to an already well-diversified portfolio.
The launching of niche sector ETFs allows equity ETF providers to differentiate their product offering beyond the core broad-market exposure such as those that track the FTSE 100 and S&P 500. A glance at the more mature US ETF market, which is often used a barometer for future developments in Europe, suggests there may still be ETF sub-sectors to be explored.
For example the US market currently boasts technological equity ETFs focused specifically on semiconductor, cloud computing and even the smart phone sectors.
Another ETF provider keen to broaden their product offering is Source, who recently launched Europe's first Biotechnology ETF (SBIO).
