Market Overview

Why Long-Term Trends Remain Favorable For Robotics ETFs

Why Long-Term Trends Remain Favorable For Robotics ETFs

After posting stellar returns in 2017, robotics and artificial intelligence exchange traded funds are struggling this year. Down nearly 8 percent this year, the Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ) epitomizes the trend.

The good news is that the struggles being endured this year by robotics ETFs don't hinder the longer-term bullish thesis for these products.

What Happened

BOTZ and some rival robotics and artificial intelligence ETFs rapidly gained traction with investors. The Global X fund recently turned two years old and has over $2 billion in assets under management, indicating investors are willing to bet on the robotics industry's favorable growth trends. One of the themes bolstering the robotics investment thesis is robotics-as-a-service (RaaS).

“Taking cues from software-as-a-service (Saas), robotics-as-a-service (RaaS) provides firms with an avenue for implementing automation into their processes while avoiding large upfront capital expenditures and reducing the risks associated with maintenance and upgrades,” said Global X in a recent research note.

“Traditionally, a firm looking to incorporate robotics would need to secure financing to purchase robotic equipment upfront. This ownership model is capital-intensive and often requires the purchaser to service the robots on their own or pay on an as-needed basis for maintenance. RaaS, by comparison, allows firms to pay a recurring fee to a robot manufacturer to lease the machinery. Such fees can be structured to include upfront implementation costs as well as preventative and emergency maintenance.”

Why It's Important

BOTZ tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index. That benchmark includes companies engaged in industrial robotics and automation, non-industrial robots, and autonomous vehicles, among other industries.

Another compelling theme accessible with BOTZ is the growth of task-specific robots. Think drones or the robots used to perform tasks in industrial warehouses.

“The concept of a single robot that can do anything and everything remains compelling to both robot manufacturers (who would prefer to only have to make one universal robot) and to robot purchasers (who would prefer to only have to buy one type of robot),” according to Global X. “Yet limitations in engineering, artificial intelligence, and costs, have swung the pendulum the other way, leading to the rise of task-specific robots. It is simply much easier and cheaper to develop a robot that can do one thing really well.”

What's Next

While the long-term outlook for BOTZ remains compelling, the near-term outlook is murky. The fund is down more than 20 percent from its 52-week high, implying a bear market and that underperformance is occurring as the technology sector is this year's best-performing sector.

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