Whether we realize it or not, artificial intelligence is infiltrating almost every area of our lives. No longer should it be considered a cutting edge technology of the future. It's here today. Tools, such as Alexa, Siri, Google Maps and Amazon shopping recommendations, are all examples of AI applications used in real life.
Tech stocks and ETFs are still seeing significant net inflows despite the recent pullback. Robotics and artificial intelligence ETFs, however, have received only modest interest from investors. This group has delivered fantastic returns over the past year, but their performance during that time has trailed hotter and more attention-grabbing sectors, such as semiconductors and software.
According to ETF Action, there are 5 major robotics & artificial intelligence-themed ETFs garnering about $5 billion in total assets between them.
The two clear winners in the space, however, are the two ETFs that have been around the longest - the Global X Robotics & Artificial Intelligence ETF (BOTZ) and the ROBO Global Robotics & Automation Index ETF (ROBO).
While, on the surface, these two thematic ETFs would appear to be similar and, therefore, interchangeable, that's far from the case. Portfolio overlap, concentration and management fees are just a few of the factors that investors should consider before making a choice. Given that BOTZ and ROBO are easily the largest, oldest and most liquid ETFs in this space, the choice probably comes down to one of these two funds.
Battle of the Robotics ETFs
BOTZ and ROBO is a unique case where the 2nd-to-market ETF has actually done better than the original.
ROBO launched back in late 2013, but toiled in relative obscurity for the first three years in existence. By the end of 2016, ROBO had managed a very modest $100 million in total assets.
The timing of the BOTZ launch, however, couldn't have been more ideal. It debuted during the 2nd half of 2016 right before this sector took off as the utilization of robotics became an increasingly popular market theme. As a result, assets under management ballooned.
The robotics sector was one of the market's best performers in 2017. In a likely classic case of performance chasing, BOTZ returned 58% compared to the 44% return of ROBO. That was enough for BOTZ to exceed its predecessor in the asset war, a title it still holds today.
That 2017 performance, however, should emphasize the point that these two ETFs are not that similar. As such, there is enough difference between the two that investors should look under the hood to make the determination for themselves which is more preferable.
Fortunately, I've done the work for you.
Let's break down several of the most important factors in this ETF battle.
An ETF's expense ratio is one of the most factors to consider when choosing a fund. The difference fees becomes a little less consequential when you're dealing with broad-based index funds that cost less than 0.10%, but they become more important when you're dealing with more specialized sector or niche focused product, such as a robotics ETF.
BOTZ charges 0.68% annually, while ROBO comes in at a comparatively much larger fee of 0.95%.
I tend not to get too bogged down in just a couple of basis points, but a 0.27% difference is fairly sizable. It's not enough on its own to make BOTZ the clear choice between the pair, but it's definitely a point in its favor.
BOTZ tracks the performance of the Indxx Global Robotics & Artificial Intelligence Thematic Index. According to the fund's website, it "seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles".
ROBO is linked to the ROBO Global Robotics and Automation Index. It focuses on companies that derive a portion of revenues and profits from robotics- and/or automation-related products or services, including artificial intelligence, unmanned vehicles, software that enables virtualized product design and implementation, three-dimensional printers, navigation systems, and medical robots or robotic instruments.
While both funds appear to target a similar objective at a high level, there is one important distinction if you dig down in the fine print of the prospectus. In the case of BOTZ, potential components must derive "a significant portion" of their revenues from the robotics and artificial intelligences themes. ROBO only requires companies to derive "a portion" of revenue from these themes. It could be viewed as simple as a minor wording difference, but it likely makes BOTZ more of a pure play on this theme. Another point in its favor.
Here's where we begin to see a few stylistic differences between BOTZ and ROBO.
I won't go into a discussion of valuation metrics here, but suffice it to say that both portfolios are relatively expensive.
If you look at the portfolio overlap, the two ETFs have just 25% of assets in common. Part of that is due to the relative concentration factor of BOTZ, part of it is due to the size of the companies they target, part of that is due to their weighting methodology and part of it is due to their international exposure.
There's also a distinction in the number of holdings. Where ROBO has nearly 90 holdings in its portfolio, BOTZ carries just 32 names. BOTZ is market cap-weighted with 7 of the fund's holdings accounting for more than 5% of assets. ROBO is equal-weighted with no single holding getting more than 2%. Clearly, ROBO wins from a pure diversification standpoint.
While both tilt heavily in the direction of growth stocks, Morningstar suggests that BOTZ falls more into the large-cap growth category, while ROBO leans more mid-cap growth.
The other big differentiator is international exposure. Both funds focus on global companies. ROBO has about half of its assets overseas, while BOTZ is approaching a full 2/3 of the portfolio. Japan is the largest individual country holding in both funds - 20% of assets in ROBO, but a huge 40% allocation in BOTZ. The international presence in both funds is both understandable given where the technology is being developed and an advantage in terms of where the markets might be headed. International stocks have lagged for years, but could be primed for a comeback in a global economic recovery.
It would be a little unfair to compare the investment results of ROBO and BOTZ all the way back their inception dates, since they launched about three years apart. Let's instead just look at the past performance of the pair going back to BOTZ's inception in late 2016.
From start to finish, the performance of both ETFs has been nearly identical, but there have been some peaks and valleys along the way. When the tech sector has been a market leader, BOTZ has generally performed a little better, but that outperformance comes with a modestly higher degree of volatility. On a longer-term basis, BOTZ has been consistently about 5-10% riskier than ROBO, largely thanks to the concentration factor and market risk.
If you want to consider just the performance of last year, BOTZ gained 52% compared to the 45% return of ROBO.
In my view, BOTZ comes out ahead of ROBO, but there's enough of a difference between the two funds that ROBO can still make more sense depending on your investment objectives.
The management fee difference is a significant consideration whichever way you're leaning. You can't control the performance of a fund or its index, but you can control how much you pay for it. A 0.27% annual savings with BOTZ is notable.
A few thoughts on the past performance of these two funds. Yes, BOTZ has generally outperformed ROBO, but it's important to remember that these funds simply try to match an index, not outperform the market. As such, it's more appropriate AI ETFs based on the construction of the index and whether or not they make sense.
As mentioned up above, BOTZ looks like it offers more pure exposure to robotics stocks, which is a plus, but it also comes at the expense of higher risk. If you're looking for more of a home run swing, BOTZ probably offers a little better opportunity for higher returns. If you want a modestly lower risk profile, ROBO may make a little more sense.
If you're looking for a high quality artificial intelligence thematic ETF, I'm still leaning towards BOTZ. I wouldn't sleep on the First Trust Nasdaq Artificial Intelligence & Robotics ETF (ROBT) though. It's a bit of a late arrival in this space, but First Trust has a huge distribution network and a robotics and artificial intelligence themed ETF fits in nicely with its expansive lineup. It also comes with a lower expense ratio than either BOTZ or ROBO, so it warrant more consideration over time.
Over the long term, the information technology sector is still one of the best areas to invest in and the robotics market has much potential over the next decade and beyond.