October 28, 2013      

SEEKING ALPHA? On October 22nd, ROBO ETF has debuted on NASDAQ. Billed as a global tactical play on the robotics and automation industry, it tries to capture a relatively early trend. Is it worth a look and why should investors care?

Exchange Traded Concepts filed an SEC registration for the new ETF. Robo-Stox Global Robotics ( August 6, 2013). Global Robotics and Automation Index ETF (NASDAQ: ROBO) is the first ETF dedicated to the growing area of robotics and automation.

Under The Hood

ROBO’s portfolio consists of 77 stocks. They’re split 40/60 into “bellwether” stocks, securities which the Index Provider believes are indicative of the performance of Robotics and Automation Companies as a whole, and “non-bellwether” stocks, securities of companies that have a distinct segment of their business involved in robotics-related and/or automation-related products and/or services, that the Index Provider believes will drive higher revenues as such products and/or services expand.

The constituents are equally weighted within the two categories, with 18 bellwether stocks (SEE chart below) at 2.22% weight each, and the 59 non-bellwether companies at 1.02% each. The bellwethers are listed below.

Portfolio Observations and Risks

On the first day of trading after 100,000 shares were priced at $25, giving it $2.5M AUM, ROBO traded 227K shares in the range of $24.91 to $25.33 and closed the day on the high.

Obviously, liquidity will remain an issue until or unless the ETF gathers a critical mass. ROBO commands a management fee of 0.95%, a pretty hefty price tag for an all-equity fund, but understandable given its portfolio and quarterly rebalance.

In addition to the usual set of risks associated with new ETFs, there is also non-diversification risk (most of the names in this basket can be expected to be highly correlated), geographic risk of underlying securities markets being closed during the time of trading, and foreign stocks and FX risk. In fact, the fund does not invest in ADRs, which are either not available or illiquid.

ROBO will hold liquid global companies with a market cap greater than $200 million and trailing average daily volume of at least $200,000. The ETF’s prospectus states that the portfolio will likely contain only about 40% US stocks. Currently, as you can see on the pie chart, Japan has the second largest exposure with 24%, followed by Germany, Taiwan and Switzerland, with 7.5%, 6% and 5%, respectively.

As for the industry breakdown, it should be no surprise that some 82% of the portfolio falls within industrial and technology sectors, but the rest may give you a pause.

robo_categories

According to the company’s website, “At ROBO-STOX, our driving focus is to provide investors with access to the emerging robotics and automation sector, without regard to primary industry or geographic location.”

This means that the index provider leaves a lot of discretion as to what can be considered a “non-bellwether” company deriving revenue from robotics.

Further, the prospectus stipulates, “The Fund will not invest less than 80% of its total assets in securities that comprise its underlying index.” Wait a minute. This is the type of statement you read in a prospectus of a managed mutual fund, typically not in an ETF one.

Robotics & Automation Industry Overview

So that brings up an obvious question: what constitutes a robotics or automation company?

Most people when hearing of robots still have an image in their head similar to this one. It’s a somewhat romantic and fantastical notion of a mechanical creation thinking for itself and doing all kinds of cute things, fed off by a generation of books and movies on the subject.

The reality is quite different. Many technological advances in Robotics & Automation in recent years provided a series of reliable applications and hold promise to revolutionize several industries, including healthcare and defense. And the science and technology of artificial intelligence has also made some leaps in recent years.

Early investments in new, promising technologies carry obvious risks, but also offer handsome rewards if successful, and robotics certainly carries a promise of a bright future. Unfortunately, due to its nature, there are very few “pure plays.”

Many advances in the field of robotics are made by large companies in the industrial, automotive and defense sectors, for example, because that’s the next natural area of their product evolution, but their robotics-related revenue may not yet be significant.

Statement: ROBO-STOX

?The growing affordability of robotic productivity gains, coupled with expanding technological capabilities, have moved this sector beyond the ?tipping point,? and the adoption of related technologies across multiple industries should continue to accelerate,? said Rob Wilson, Co-founder and CEO, ROBO-STOX, LLC.

?By introducing the first comprehensive and focused measure of the value of robotics, automation and related technologies, we are giving investors the world?s first benchmark by which to track the growing field of robotics.?

?Rob Wilson and his team at ROBO-STOX, LLC are another fantastic example of the kind of innovative and avant-garde partners ETC is lucky to have developed a relationship with? says J. Garrett Stevens, CEO of Exchange Traded Concepts. ?The cutting-edge concept and development of ROBO has been an exciting education for ETC and we are confident the time for a fund of this nature is now.?

Bellweather stocks (chart):

robo_bellweather