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Summary Automation and robotics are poised to breakout from factories and drive growth in a multitude of industries. Many pure play companies in the field are small or listed overseas, making a fund approach attractive. With lower costs and a more diversified portfolio, ROBO has the edge in this nascent investment arena. Advances in technology as well as economic and social factors are making automation and robotics more feasible for a growing number of companies in a wide assortment of industries. Self-driving cars, drone package deliveries, 3D printing and robot-assisted surgery were once the purview of science fiction. Today, these scenarios are becoming a reality. While industrial automation has been commonplace for decades in developed economies, reduced costs are now making it a viable option in the developing world as well. Once used to replace dangerous, dirty and labor-intensive jobs, automation and robots are being integrated into more aspects of an increasing number of jobs due to advances in tracking sensors, machine controls, nanotechnology and programming. In addition to industrial applications, automation and robotics are also used to deliver needed social services and help people live independent lives. Social, economic and technological trends are pushing advances in the development and integration of automation and robotics. While still in its infancy, the automation and robotics sector offers long-term investment potential. One way to invest in this burgeoning sector is the Robo-Stox Global Robotics And Automation Index ETF (NASDAQ: ROBO ). Another option is the 3D Printing, Robotics and Technology Fund Inv which has two classes of shares. The fund’s institutional class shares trade under the ticker symbol TDPIX while the investor class utilizes the ticker symbol TDPNX . Robo-Stox Global Robotics and Automation Exchange Traded Fund ROBO is a Science and Technology Fund that seeks to replicate the price and yield performance, before fees and expenses, of the ROBO-STOX Global Robotics and Automation Index. The ETF normally invests at least 80 percent of assets in securities contained within the index, which is formulated to measure the performance of companies primarily engaged in or supporting robotics and automation. Securities within the index have a market capitalization in excess of $200 million and a 1-year trailing daily trading average volume of $200,000. The index is divided into four basic categories. This include industrial robots, service robots for government and corporate use, personal- and private-use robotics and firms engaged in supporting robotics and automation. The weight of each category may vary. Managers determine which stocks are deemed bellwether due to their ability to indicate or lead trends for the market segment. The fund maintains a 40 percent weighting in these bellwether securities and 60 percent in non-bellwether shares. The non-diversified ETF utilizes a passive investment philosophy. Of the $100 million in assets in the fund, 38 percent are invested in and 62 percent is invested in foreign issues. In addition to the U.S. and Japan, the ETF has exposure to Developed Europe and Developed Asia. The fund is heavily weighted toward industrial, information technology and healthcare sectors. With an average market cap of $2.7 billion, the fund has 9.9 percent exposure to giant cap companies as well as an 11 percent and 45 percent exposure to large and mid-cap stocks. The fund also holds 17.41 percent and 16.56 percent allocations in small- and micro-cap shares respectively. As of October 15, ROBO had a P/E ratio of 18.05 and a price-to-book of 1.74. The largest holding in ROBO has only 2 percent of assets, making for a well-diversified portfolio. Many holdings in the fund are familiar names that may not make one think of automation, such as Deere (NYSE: DE ), but thanks to the fund’s small allocation in each holding, there’s a lot of pure play exposure to companies such as Mobileye (NYSE: MBLY ), a company working on driverless vehicles. 3D Printing, Robotics and Technology Fund TDPNX seeks long-term capital appreciation by investing at least 80 percent of assets in securities issued by domestic and foreign companies in developed as well as emerging markets engaged in 3D printing, robotics and automation regardless of their market cap. Fund advisers use a top down approach to determine potential candidates for inclusion in the portfolio. A bottom up approach is then utilized to select the stocks for actual investment within the portfolio focusing on factors like company fundamentals and growth prospects within the industry. TDPNX changed its mandate and name in July 2015 due to losses in 3D printing shares, which it was its exclusive focus until then. The fund’s new name and portfolio reflect its branching out into robotics as the 3D printing stocks dipped into a bear market. The new focus is designed to capitalize on the growth in both of these fast growing segments, while avoiding concentration in the narrow slice of the economy. The fund holds 47 percent of assets in domestic stocks and 44 percent in foreign shares. In addition to the U.S., TDPNX has significant exposure to Developed Europe and Greater Asia, primarily Japan. The portfolio has a 16 percent weighting in giant cap stocks as well as 17, 21, 22 and 24 percent weightings in large-, medium-, small- and micro-cap stocks respectively. The fund’s average market cap is $4 billion. The portfolio has a P/E ratio of 25.3 and a price-to-book of 2.21. Fund Comparison ROBO has outperformed TDPNX since the inception of the latter in April 2014. TDPIX has declined 23 percent over its life, while ROBO is down approximately 11 percent over the same period. Since changing its mandate in July, TDPNX has outperformed ROBO, losing 6.5 percent versus ROBO’s 11 percent decline-but it’s much too short a period to draw a conclusion from. ROBO is a fund that delivers on its name. The fund’s extensive holdings include companies involved in robotics, from traditional companies within the industry to those new in emerging sectors, such as unmanned vehicles and medical fields. The top holding in ROBO has barely more than 2 percent of the fund’s assets, and the top 10 have less than 22 percent of total assets. The top 10 in TDPNX accounted for 47 percent of assets as of June 30. TDPNX is a broad fund but makes more concentrated investments. The 3D Printing Fund has only 46 holdings compared to the 82 separate investments within the ROBO portfolio. TDPNX also counts large caps such as Hewlett-Packard (NYSE: HPQ ) and General Electric (NYSE: GE ) among its top ten, diluting some of the pure play exposure (the fund reports it has 46 percent pure play exposure ), but this explains why the fund outperformed ROBO over the past three volatile months. (click to enlarge) TDPNX is the more expensive fund. The Institutional Class has a net expense ratio of 1.25 percent while the investor class’ net expense ratio is 1.50 percent. The fund’s adviser has contractually agreed to waive management fees and/or reimburse expenses through April 15, 2016. Shares are subject to a fee of 2 percent when redeemed within 60 days of purchase. ROBO charges 0.95 percent and is subject to brokerage trading fees like most other ETFs. Conclusion The long-term prospects for automation are better than ever as automated software and hardware are ready to move off the factory floor and into the home, office and highways. Investors who take an aggressive approach can achieve broad exposure with the aforementioned funds. The mandate shift by TDPNX is a good one and makes for a more conservative fund, but this niche segment of the economy will be highly volatile even with some exposure to a Dow component such as GE. ROBO is therefore the more attractive fund for now, in addition to being cheaper and offering broader exposure, but the ETF suffers from low volume. The risk isn’t so much in getting in, but in getting out in the event investors rush to the exits. We saw ETFs suffer flash crashes in August and ROBO was among them. Investors can make ROBO a small niche holding in a diversified portfolio, but be prepared for rollercoaster rides during periods of high market volatility. Scalper1 News
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