by Aaron Levitt | October 25, 2013 12:16 pm
Here at InvestorPlace, we’re big fans of low-cost exchange traded funds.
The security type and funds like the Vanguard Total Stock Market ETF (VTI) can be used as cheap core building blocks, while various sector and alternative asset classes can add some “spice” to a portfolio. Both retail and institutional investors seem to agree with us. Over the last two decades, the U.S. ETF industry has ballooned and now holds roughly $1.6 trillion in investors’ assets.
All in all, the fund type has changed the game and put more control back into the hands of investors.
But sometimes, the fund industry can be a little too overzealous with new products and funds. The ETF graveyard is littered with failed concepts (I’m looking at you, Global X Fishing Industry ETF). That’s why investors must look at new specialized fund launches with a grain a salt. What may seem good at first blush, might not be such a good idea longer term.
And the latest “hyped” launch could prove to be another flop.
Oklahoma-based Exchange Traded Concepts — using its “ETF In A Box” platform — launched the first ETF focused on the robotics and automation industries. I’ll let that sink in for a minute.
According to its prospectus, the new Robo-Stox Global Robotics and Automation Index ETF (ROBO) will focus its attention to those firms building industrial robots and service robots for government, corporate or personal use, as well as ancillary businesses related to robotics and automation. The ETFs mandate allows it cover everything from actual unmanned vehicles and medical instruments to software and three-dimensional printers.
Fund manager Robo-Stox then sorts the ETF’s constituents into “bellwether” and “non-bellwether” stocks with the 40/60 split. The idea is that the “bellwether” firms will represent the performance of robotics and automation firms as a whole, while the “non-bellwether” firms will generate higher revenue as their products and services grow.
Expense for the ETF run a bit high at 0.95% or $95 per $10,000 invested.
Since pure-play robotics are extremely rare — most of them are located in Japan and Germany — Robo-Stox searches far and wide to come up with the fund’s holdings. That effort ultimately plays a little loose with what constitutes a robotic play.
Some of ROBO’s 77 robotics companies should familiar to investors and fit the basic premise of investing in robots. Top holdings include iRobot (IRBT), robotic surgery forerunner Intuitive Surgical (ISRG) and Rockwell Automation (ROK).
However, several others are a bit of a stretch. For example, agriculture and tractor play John Deere (DE), GPS firm Trimble Navigation (TRMB) and Microchip Technology (MCHP) are all major holding of the fund. By the way, Microchips’ bread-n-butter business is providing semiconductors for things like toaster ovens and TV remote controls.
And that’s the funds major flaw — investors aren’t getting pure-robotic exposure.
While all of the firms in ROBO dabble in automation, for many it’s just a small part of their overall earnings. Deere is still influenced more by the whims of the agricultural futures market and crop yields than recent moves to produce self-driving tractors. France’s Schneider Electric is guided more by major electrical grid infrastructure projects and data/smart metering than its automation products. The list goes on.
And given ROBO’s loose definition of robotics, there are plenty of missing components as well. If you’re going to include Schneider, why not building automation specialist Johnson Controls (JCI)? And if we have TRMB in there, why not Garmin (GRMN)?
You can’t yell at Robo-Stox for trying something new. After all, there are only so many Russell 2000 funds the ETF industry can take. While the concept is cool, ROBO falls flat on its overall goals. Forces that have nothing to do with automation or robotics influence just too many of underlying holdings, which makes for a poor sector bet.
Investors truly looking to bet big on robots are better off buying shares in IRBT or perhaps just a broad tech or industrial ETF. You’ll get basically the same coverage as ROBO minus the huge annual expense ratio. That’s a far better bet indeed.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.
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