BOTZ: Betting on the future of robotics and AI (NASDAQ: BOTZ)

Deep learning, artificial intelligence background

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Investment thesis

Robots have a wide range of benefits, from saving time and money to working in hazardous environments. According to Intelligence of MordorThe global robotics market was valued at $27.73 billion in 2020 and is expected to to reach $74.1 billion by 2026, registering a CAGR of 17.45% during this period. The falling cost of robots has been one of the main catalysts for growth over time. For example, the average cost of an industrial robot rose from $46,000 in 2010 to $27,000 in 2017 – and is expected to drop below $11,000 by 2025 as technology improves, enabling a greater use in all sectors.

Global robotics market

Intelligence of Mordor

On the other hand, global artificial intelligence market size was valued at $93.5 billion in 2021, and it is expected to grow at a CAGR of 38.1% from 2022 to 2030. Continuous research and innovation led by IT giants is driving technology adoption sophisticated AIs in a large number of industries. Overall, I think robotics and AI have a big avenue ahead of them and both segments will grow faster than the global economy. In this article, I will review the Global X Robotics & Artificial Intelligence thematic ETF (NASDAQ:BOTZ), which provides exposure to a basket of companies involved in the AI ​​and robotics revolution.

Policy Details

The Global X Robotics & Artificial Intelligence ETF (BOTZ) tracks the performance of the Indxx Global Robotics & Artificial Intelligence thematic index. The index invests in companies that stand to gain from greater acceptance and use of robotics and artificial intelligence, such as those active in industrial robotics and automation, non-industrial robots and cars autonomous.

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Composition of the portfolio

From the sector allocation table below, we can see that the index places a high weighting on the information technology sector (representing around 40% of the index), followed by industrials (representing 40% of the index) and healthcare (representing around 12% of the fund). The three main sectors have a combined allocation of approximately 94.55%.

Sector breakdown

Global ETFs X

In terms of geographic allocation, the United States represents 42% of total assets, while other countries such as South Korea seem to be underrepresented given their low weight (only 0.3% allocation to South Korea).

breakdown by country

Global ETFs X

BOTZ invests over 62% of funds in large-cap growth issuers, characterized as large companies where growth characteristics predominate. Large-cap issuers are generally defined as companies with a market capitalization greater than $8 billion. The second largest allocation is made up of mid-cap growth stocks. Unsurprisingly, this ETF allocates around 92% of funds to growth stocks, which are generally more volatile than value stocks.

the morning star

the morning star

The fund is currently invested in 38 different stocks. The top 10 holdings represent around 67% of the portfolio, with no stock weighing more than 12%. Overall, I would say the fund is quite focused on a few high conviction names. I think it’s important to be comfortable with such a portfolio before buying BOTZ because such concentration can remove some of the diversification benefits and increase volatility.

main holdings

Global ETFs X

Since these are stocks, an important characteristic is the valuation of the portfolio. According to Global X ETFs, BOTZ is currently trading at an average forward price to earnings ratio of 4.24 and an average forward price to earnings ratio of around 35. forward price/earnings above 20 is highly valued. Also, I think it’s hard to justify holding stocks with a P/E above 20 as the Fed and other central banks around the world begin to tighten monetary policy and raise interest rates. .

Is this ETF right for me?

Below I have compared the price performance of BOTZ against the ETF Invesco QQQ (NYSEARCA:QQQ) over the past 5 years to assess which was a better investment. During this period, QQQ outperformed BOTZ by more than around 110 percentage points. To put BOTZ’s performance into perspective, a $100 investment in this ETF 5 years ago would now be worth around $184.49. This represents a compound annual growth rate of around 13% excluding dividends, which is a good absolute return.

Global X Robotics AI vs. QQQ Chart

Refinitiv Eikon

Going forward, I would personally be cautious about BOTZ given that we are now entering a new phase of monetary policy where liquidity is likely to be scarce compared to the previous decade. At the same time, we know that high inflation is likely to put strong pressure on valuations and that high PE stocks are the most vulnerable category in the current market environment. This is reflected in BOTZ’s performance over the past 6 months where we can clearly see that it has underperformed the market. I don’t see any catalyst to reverse this trend in the near future. Thus, I expect BOTZ to underperform the market over the next two months.

Search Crestmont

Search Crestmont

Key points to remember

Robotics and artificial intelligence are among the fastest growing industries in the IT sector. As a result, they are expected to grow much faster than the global economy, providing an attractive investment opportunity. BOTZ offers exposure to a basket of leaders in the fields of robotics and AI.

However, if we look at valuations in these two categories, a large number of companies are trading at more than 30 times earnings and are overvalued in my opinion, leaving no margin of safety for potential buyers. This adds a lot of risk in my view in the current market environment given that we are at an inflection point in monetary policy and inflation is soaring. I think BOTZ’s recent underperformance should continue into the next month, which should provide a good buying opportunity at some point for patient investors.

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