ETF Expert Corner

ROBO Global’s Chris Buck Explains Index Behind ROBO ETF, Discusses Robotics Landscape

June 6th, 2017 by ETF Store Staff

Chris Buck, Head of Capital Markets & Sales at ROBO Global, explains the index behind the ROBO Global Robotics and Automation Index ETF (ROBO) and discusses the growth potential of the rapidly-evolving robotics industry.


You can listen to our interview with Chris Buck by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: The ETF we’re spotlighting this week is the ROBO Global Robotics and Automation ETF, ticker symbol ROBO. This ETF has really grown in popularity - it's taken in nearly 450 million dollars just in the past 12 months alone. Joining us via phone from San Francisco to discuss this ETF is Chris Buck, Head of Capital Markets & Sales at ROBO Global, the creator of the index behind the ROBO ETF. Chris, great to have you on the program today.

Chris Buck: Thank you, Nate, for allowing me to join today. It's great to be here.

Nate Geraci: Chris - first can you just provide some background on your firm ROBO Global and where the idea for this index came from?

Chris Buck: Sure. First, I want to thank you guys for the effort you're doing with The ETF Store and the radio show. It's great how you're educating investors about ETFs and there are some parallels if you look at the ETF market and the explosive growth compared to automation and robotics. We believe we're really at the beginning of the fourth industrial revolution. Me and my partners four years ago, who were very passionate about this space, created an index company that is exclusively focused on the robotics and automation industry. Four years ago, when we created the index, we also created our own proprietary, industry classification system with the help of the world's leading robotics experts. We have over four PhDs who are the preeminent thought leaders in robotics and automation and please go to our website, to review their bios, I won't go into them here. But we've built the index because we believe robotics and automation will transform the world, in simply how work gets done. No one had previously tracked the industry and there wasn't an investment vehicle that provided access to this trend. Kind of a high level overview, the 30,000 foot level for investors - the index is comprised of pure play robotics companies. There are companies that fit into our own 13 sub-sectors, which we have identified as high growth and high value areas. Luckily, with the help of our experts, we've bifurcated the ecosystem between applications (which are the companies that are enabling makers of robotics) and automation (they're not the users, but the ones who are producing robotics). And then also, the 50% of the rest of the portfolio is in technology. These are the companies whose product, services, and technology empower robotics. Think of the things that make robots sense, see, computational processes, and acts. There's roughly 82 companies in an equal-weighting scheme. It's a multi-cap, over 75% of the portfolio is small and mid-cap, only 25% large-cap. It's global, the index represents over 15 different countries and we rebalance quarterly as we believe, and I think many will agree, that the robotics and automation market is evolving very, very fast and hope to explore that today with your listeners.

Nate Geraci: Chris - to give our listeners a better idea, can you maybe walk us through a few of the individual holdings in this index? What are some of the companies and what specifically do they do?

Chris Buck: Sure. We broadly look at again, 13 sub-sectors and within any sub-sector, we have company holdings and some of them are not household names. In fact, let me highlight briefly, if you look at our index compared to very broad indices, the S&P 500, or NASDAQ, or ACWI, which is a very broad-based global benchmark, we have less than 2% overlap with any existing broad market indices and in fact, year-to-date we're up roughly 20%, prior 52 weeks we're up over 40%, which is beating the S&P in a 52 week period by some 20, 23%. These companies, and I'll highlight a few here, one of which is Cognex, which is really focused on machine vision. If you think about how important robots are in manufacturing, or surgical, or certainly in autonomous driving, video compression and how well a computer system or a robot can see is super important. So Cognex, ticker CGNX, recently announced an acquisition of a system that's using deep learning and artificial intelligence to really speed up and get the next gen for machine vision. Another company you may have heard, is a very large industrial robot manufacturer in Japan called Fanuc. Last quarter, they reported a really great beat and raised earnings estimates, after a prolonged slump in their robodrill demand from smartphone makers. We're seeing a huge increase in capex and they just announced they're boosting capacity by 66% from making 6,000 to 10,000 robots per month. So clearly Fanuc is one. Another one, I think many of us might know as a gaming company, NVIDIA, spent a lot of time on the processing - so we have the eyes, the manufacturer and now we also have the processing. NVIDIA's automotive segment grew sequentially year-over-year and in fact, NVIDIA's team is working with over 225 auto and truck suppliers and are partnering with AI and autonomous driving and they expect to produce what's called Level 4 self-driving chips by the end of 2018. These are going to be the processing chips that can take huge amounts of data and video compression to actually help cars drive more effectively without a driver. Those are just a few, we have over 82 different names that are similar to this.

Nate Geraci: What's maybe an example of a company in this index that's automating a process that might surprise us? I think many of our listeners have heard about robots in factories and autonomous driving. What's an area that is perhaps less talked about, but where you see the potential for significant impact?

Chris Buck: Well, I certainly think one of them - if you just look at global manufacturing as a good use case - McKinsey Consulting estimates that the manufacturing costs globally are about six trillion dollars, right? So, that's a huge opportunity for people to create innovative products to kind of address industrial manufacturing. In fact, a research firm, Myriad, that we often follow, predicts the operating systems’ hardware, software, and services will grow to over 1.2 trillion by 2025. That's a compound growth rate of about 30% from 2017 to 2020. They expect it to grow about 40% per year from 2020 to 2025 and so we're moving from a nice-to-have to we have to automate to survive. One of the industries that's really caught the attention and fascination of everybody is 3D printing. 3D printing has less than 1% penetration of around a five hundred billion addressed full market. Traditionally, 3D printing if you're not familiar with it, it's a machine that literally goes from CAD-CAM and makes products and services. It's gone from making prototypes and molds, to now making consumer products. The Wall Street Journal recently had a nice article on how Adidas is making customized, in mass-production and in scale - using 3D printing - to make shoe lasts online so, we believe, as many believe, that 3D printing is going to really revolutionize many of the components of manufacturing. Certainly, GE last September spent over two billion dollars buying 3D printers and metallurgy to help with their aerospace business. That's certainly a case to watch. Manufacturing will continue to embrace technology to increase productivity.

Nate Geraci: Our guest today is Chris Buck, Head of Capital Markets & Sales at ROBO Global. We're spotlighting the ROBO Global Robotics and Automation ETF, ticker symbol ROBO. Chris - let's spend a few minutes discussing the overall growth opportunities in this space. You mentioned a stat earlier, and I know it's also at your website, that the robotics economy is projected to grow to 1.2 trillion dollars in 2025. It was 64 billion at the end of 2016, obviously a substantial increase. Just high level, what's expected to drive this growth?

Chris Buck: I just touched on that a little bit and it certainly sounds almost far-fetched to understand a market that's growing that fast. When we looked at the global economy and the global ecosystem, certainly the 13 sub-sectors we identified are going to be behind the growth. We talked about 3D printing. Another one, that's really going to be tailwinds for this growth is warehouse and logistics. Now, if you think of warehouse and logistics, many of us are driving in the summer after school and you drive down the highway and you see these huge warehouses where essentially firms like Ikea and Walmart store their information, store their products and goods, and then they have to send them out to all the different stores. Well, there's over 17,000 warehouses in North America alone and less than 1% of them are automated. This is truly a tremendous runway for growth and given the massive e-commerce growth, the advantages to speedy, cost effective error-free distribution will be a significant growth area for robotics. E-tailing or e-commerce is a true two trillion market and growing at 20% compound rate. This is really leading the charge to advance technology. The e-commerce business is putting a ton of pressure on the traditional retailers. Now, if you think of traditional retailing, that's a 22 trillion dollar global market and, right now, they’re being pulled in the same direction to compete and survive. We expect these trends to accelerate the pace of automated material handling machines and equipment. In this world, you look at trade – trade is traffic control - that's literally how they move products from delivery to the truck to your store. This will be massive. One of the companies that often times people think about is Amazon. It was a huge beneficiary of this automation. Many of your listeners shop Amazon and expect customer fulfillment to be next day or two day delivery and it's free. Well, this is only made possible by the acquisition at Kiva Systems in 2012. Kiva Systems, which was bought for 775 million, was co-founded by one of our strategic advisers that I talked about earlier, Raff D'Andrea, who helps us with our index process. Really, Kiva Systems is Amazon Robots, which is now what you think about the 40,000 robots sitting in the Amazon warehouses, that when you order something on Amazon Prime, is doing the customer fulfillment. It's really a massive market and with 17,000 warehouses, it's going to be a great growth trend for years, if not decades.

Nate Geraci: Chris - we have just a few minutes left here. Not to delve into politics - because we try to avoid that whenever possible on this show, especially now - but it's interesting, President Trump both throughout his campaign and now that he's in the White House, he's really emphasized his desire to keep jobs here in the US. But because our labor costs are so much higher than in other areas around the world, if Trump is successful in doing that, it would seem like that might actually incentivize US companies to automate jobs, since that would be cheaper. And, as it turns out, since the day after the election, the ROBO ETF has taken in some 430 million dollars in new assets. That can't be a coincidence, can it?

Chris Buck: I think there's some common threads. There's a couple of reasons. Like anything, we created the index four years ago and we're pretty early, and there's a confluence of things that have occurred and part of it is artificial intelligence, and big data, and the Internet of things. You look at Moore's Law, which is, cutting the costs of computing, and the costs of robots are now down to $15,000 for some robots. I want to highlight briefly, this coming Monday we're doing a bell-ringing at NASDAQ with another portfolio company called ABB out of Zurich, so you'll actually see one of our robots that's being produced by ABB, ring the bell for the opening bell for NASDAQ this coming Monday. I think there's a group, an op-ed that I like to cite, in the journal a couple weeks ago they talked about labor and there's a gentlemen Mr. Swanson and Mr. Mandel, who's a fellow at the US Chamber of Commerce and also, Mandel is at the Mack Institute for Wharton, suggests the problem today with labor productivity is really, not enough technology. The CBO expects productivity to grow at a snail's pace, about 1% over the next two years, and these gentlemen divided our economy between digital and physical. Digital is what you would imagine - technology, communication, software, finance. In the physical industry, which is healthcare, transportation, education, manufacturing, retail, which is only growing at .7 tenth of a percent. Well, physical industries haven't invested in technology at the same pace as digital companies and this is partly due to regulation. I think that as Trump is pretty vocal about reeling back some of the regulations, people worked quickly to identify that the physical economy is 75% of the private sector employment and 70% of the US GDP output. So, through robotics and automation, it's smart automation, people are expecting increased labor productivity in the physical economy and people know it's going to be disruptive, but people draw parallels to the digitization of e-commerce. There were over 397,000 created through the digitization versus 76,000 jobs that are lost. We see this productivity to be actually a big push through getting GDP, especially in the US, higher. There are many people who believe that the information technology actually will create new business models, products, and platforms and actually kick-start our GDP and I think that's where we see a lot of the people and their earnings and growth are coming through in our portfolio, so people are really starting to recognize this trend.

Nate Geraci: Chris - we're running a bit short on time, so we'll have to leave it there. Just a fascinating ETF spotlight today, we certainly appreciate you joining us on the program, thank you.

Chris Buck: It's our pleasure and if you want additional information please come to ROBO Global, that's R-O-B-O and we have literature and the deck online so, thank you very, very much for allowing us to come on and we look forward to working with you in the future.

Nate Geraci: Thank you. That was Chris Buck, Head of Capital Markets & Sales at ROBO Global, again the ETF is the ROBO Global Robotics and Automation ETF.