ETF Expert Corner

ROBO Global’s Chris Buck on Investment Case for Robotics

July 24th, 2018 by ETF Store Staff

Chris Buck, Head of Capital Markets & Sales at ROBO Global, spotlights the ROBO Global Robotics and Automation Index ETF (ROBO) and explains the investment case for exposure to the space.



Transcript

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 Index ETF, ticker symbol ROBO. Joining us via phone from San Francisco to discuss this ETF is Chris Buck, Head of Capital Markets and Sales at ROBO Global. They're the creator of the index behind this ETF. Chris, great having you back on the program.

Chris Buck: Oh, it's great to be back, Nate. Thank you so much.

Nate Geraci: Chris, last we spoke, I believe a little over a year ago in June, ROBO had somewhere around $700 to $800 million in assets. This ETF now has over two billion in assets. What's that been like, just watching this ETF grow so significantly over the past year?

Chris Buck: Well, it's really been nice to see that investors - since we last spoke our ETF was up over 47% - it's been a great investment for investors. We have ETFs tracking our index in Europe, Korea, Australia, Canada, so we have over $3.8 billion in ETFs tracking our index. So, it's been a great return experience for investors.

Nate Geraci: Alright, let's delve into this ETF. It owns around 90 companies involved in developing or utilizing robotic technology. Walk us through the index. How are companies determined? How are they weighted? Anything else noteworthy?

Chris Buck: From a weighting perspective, we are an equal weight. Essentially, again, currently we just rebalanced. We rebalance quarterly. As of today, we have 87 names, just at 90, and they're roughly equal weighted between 2% and 1%. What we did is we defined the ecosystem or the supply chain. By equal weighting across the supply chain in 14 different countries and 12 different sub sectors, we're giving clients a diversified approach to investing - from 3D printing, food and agriculture, manufacturing, artificial intelligence - across the whole ecosystem if you will in robotics, automation, and artificial intelligence.

Nate Geraci: Do these companies run the full market cap spectrum?

Chris Buck: A really great point, yeah. When we look at defining the universe and helping investors trade in the robotics and the AI revolution, we're taking best of class. Again, we take 12 sub sectors and run through our index methodology, tracking thousands and thousands of stocks, bringing to fruition the top 87 names that fit within these sub sectors. So, you're getting the best of companies that have leadership positions, and 77% of our universe is mid cap and small cap. What this means is these are names globally. 60% of the investments in this ETF are not in the US markets. Yep, that's right. 60% of our companies are headquartered outside of the US because that's where the innovation unfortunately is taking place currently. They tend to be mid cap and small cap stocks.

Jason Lank: Chris, this is Jason Lank. On the subject of the geographic distribution, it makes sense to me that technology in this space is a global one. But what stands out to me is the omission in that China doesn't appear to be in the top 10 and I would have thought United States leads the pack, and it does, followed by Japan. Is that just the chips fell where they fell or is there any reason why China doesn't make its way up the list?

Chris Buck: Very good point, very astute. 30% of the revenue that's generated for our index is consumed in China. As an example, China's going to spend $150 billion in the next five years to invest in artificial intelligence. There is a robotics arms race that is currently happening between Russia, the US, Europe, and China. It's all steam ahead. What's happening in China is it's an emerging market. It's an ID market. So, there's capital controls. It's a very hard to access market, but we're currently working on positioning some China A-shares in the index.

Nate Geraci: Chris, currently one of the top holdings in ROBO is iRobot Corporation. Would you be able to tell us anything more about this company? I'm guessing this is probably a perfect proxy for the type of companies owned in ROBO.

Chris Buck: Yeah. So, because we're equal weight, on a relative basis, the top 10 names only equate to about 18% to 20% of the total value of the portfolios. So in any given quarter, almost any stock could be the top weighting. I think it's probably just a little around 2% of the total fund value, but iRobot and consumer robotics is certainly going to be a very interesting and growing component of the index. Consumer robots, like iRobot, will continually grow. In fact, some of the growth rates in consumer robotics are really just ramping up as we speak. We're in the very early innings of this.

Nate Geraci: Is there another company or two in this ETF that you find particularly interesting?

Chris Buck: I think there's one, again, the reason people invest in ROBO is we're very forward looking. To use a hockey metaphor, you want to skate to where the puck is going, not where it's been, as Wayne Gretzky used to say. One of the names that we just added to the index is a company called Ocado. They're very interesting. They're based in the UK. They have a market cap around $9 billion, so not a super big company, but not a small company. They have, essentially, are the market leading position in automated food and groceries delivery. They just signed a contract with Kroger in May of 2018 and they're going build out 20 new customer fulfillment centers across the US and employ over 3500 swarming robots that will prepare over 200000 orders per week to help customer fulfillment. So, think what Amazon does to warehouse logistics. This company is branching out globally to help fulfill customers' orders in groceries. That's a great company.

Nate Geraci: Our guest is Chris Buck, Head of Capital Markets and Sales at ROBO Global. We're spotlighting the ROBO Global Robotics and Automation Index ETF. Again, ticker symbol ROBO. Chris, I think most people listening to this show understand that robotics and automation and artificial intelligence are going to continue to play an increasing role in just about every aspect of our lives. High level, can you maybe paint the investment case here in a little more detail? Why should investors have exposure to this space?

Chris Buck: You really need to consider based on your risk tolerance, ROBO Global index, again which is global, has about the same market risk as the S&P 500, which is very attractive, but it's growing at three and four times the rate. The base case for investing, what we like to say is future proof your portfolio. You're finding market leadership, you're finding the best of great companies, and what's happening is there's been a perfect storm, if you will, why this is accelerating now and that most investors are under-appreciating the growth curve. The computational processing power, the cost of chips, and if you could imagine robots with dumb brains. They're not really particularly useful in a bunch of different industries, but because of artificial intelligence, the cost curve has come down and the performance capabilities of robotics and AI is to such a great extent, it literally is impacting every sector that we know. There's been people that would argue that robotics and AI will have 10 times the impact to society than the internet, and that's a really big statement. We're just in the beginning innings of the baseball game. It's a really interesting investment case. There's a lot written about it. I encourage all of your listeners to get very comfortable with the growth rates. Then the ROBO ETF is again giving me the best breed of the companies that you normally wouldn't know about.

Jason Lank: Chris, more of a technical question. With the very diverse geographic holdings around the world - many, many different countries - is there any merit to currency hedging? Is that something that the ETF might do, or would it be really not necessary as diverse as the number of holdings are?

Chris Buck: It's very interesting because we are diverse, to your point. It kind of counterbalances itself. Year-to-date, the fund is down 4%, and 50% of that is from currency. If you look at what happened in the second quarter with trade wars and Asia and Europe's currencies weakening relative to the dollar, it can create a headwind. But over the lifespan of the investment, since inception, ROBO is annualized a little over 11.5%. We're not making a call on currencies. We really just stick to what we know best, which is our seven PhDs helping us understand what are the best leadership and position those in the portfolio. Over time, playing currencies is a very difficult trade. I'll leave that up to the currency speculators.

Nate Geraci: Chris, you mentioned the large run this ETF had last year. It was up close to 45%. What about valuations in this space? Can you tell us anything about how attractive they may look right now?

Chris Buck: After 10 consecutive quarters, with about two and a half years, ROBO again is down 4% in this last quarter. Again, it's from weakening economic conditions in Europe, in Asia, and again, the dollar has created about 50% of it. On valuations, when we last spoke, right before the index and the ETF moved up 47%, on a forward basis we were on a 21 times forward earnings estimate. That's right where we are today. Despite being up 45% and 10 consecutive quarters going straight up, it's taken a breather and we're right back where we started from. It's an extremely attractive position. By no stretch of the imagination has this been one of those investments, gosh I wish I would have done it, now it's gone up so much I'm afraid. It's actually right back where we started. That's because the earnings momentum in these companies is so dramatic. Automation is ubiquitous. It's happening in every industry. It's happening now and you can argue it's not likely to slow down for the foreseeable future. So, valuations are extremely ... This is in line with our historic valuations, right at 21 times forward.

Nate Geraci: Alright, we have just a few minutes left. ROBO was the first robotics ETF to market, but since its launch we have seen several other robotics ETFs enter the fray. Can you maybe just do a little compare and contrast? How do you think ROBO is differentiated?

Chris Buck: We're a “best of” strategy. I think a lot of the other robotics are either super concentrated in a market cap way, and so you're taking on a lot of risk in 10 different names. They're not as diversified. There's one particular ETF that's top 10 positions were, at one point last quarter, 70% of the portfolio. So, you're almost better off just buying Nvidia than paying the management fee for a particular ETF. In some of the other exposures, it looks like they threw the whole kitchen sink in there. Anything that had the word robotic in it, they just threw it in there and slapped the name Robo. We are extremely excited that the other issuers have validated the space for investors. We think choice is extremely important based on your risk tolerance, but I think what it speaks to is how important firms like yours can help people understand ETFs and exposures. It's not the name of the ETF that matters. It's really the underlying exposure. I would encourage your listeners to really take a peak under the hood and really understand what they're investing in.

Nate Geraci: Chris, about a minute left here. I know you can't speak to potential future launches that may be in the hopper, but might we see some other ETFs from ROBO Global at some point - in maybe more narrow segments of the market? I know this particular ETF is global, but maybe something more internationally?

Chris Buck: Yeah, we have 13 different indexes currently ticking. We're doing a ton of research. Our commitment to you, we will launch no ETF until we've done our due diligence and research. We really take it personal as a mission to help people invest in the robotic and AI revolution. So, we're spending a ton of time in spaces like artificial intelligence, coming up and really understanding the stocks and the names in the portfolio. So, stay tuned. I think you will see several new ideas being launched, but just know they're going to be fully, fully vetted.

Nate Geraci: Well Chris, with that, we'll have to leave it there. Excellent spotlight today. Congratulations on all the success with ROBO. We certainly appreciate your time.

Chris Buck: Oh, well we thank you so much for finding us and look forward to talking to you in the future.

Nate Geraci: Thank you. That was Chris Buck, Head of Capital Markets and Sales at ROBO Global. Again, the ETF is the ROBO Global Robotics and Automation Index ETF, ticker symbol ROBO. You can learn more about this ETF by visiting roboglobaletfs.com.