Why professionals aren’t jumping on the robotic ETFs trend

According to Morningstar, there are only two robotics ETFs available to European investors: Legal & General’s Robo Global Robotics and Automation (ROBO) and iShares Automation and Robotics (RBOT).

But investing in the ETFs is expensive. The iShares ETF has an ongoing charges figure (OCF) of 0.40%, while the fee on the L&G ETF is double that at 0.80%.

“The high fees are a result of Economics 101: very little competition,” says 7IM senior portfolio manager Peter Sleep. Along with a number of other multi-asset investors, Sleep is not a fan of thematic investing, arguing many niche funds have stretched valuations.

But Monika Dutt, analyst at Morningstar, argues robotic ETFs tend to be more diversified compared to technology sector ETFs at stock level.

Apple and Microsoft make up 20% of MSCI World/Information Technology and S&P US Technology Indices, respectively, Dutt says. However, stocks in thematic ETFs tend to represent 1%-2% of the entire portfolio, making them less susceptible to idiosyncratic risk.

Hot trend

Lynn Hutchinson, head of passive product research at Charles Stanley, says there has been “remarkable” growth in assets in the two robotics ETFs.

Despite launching 2016, the $2.4bn iShares ETF holds almost double the assets of the L&G ETF, which has $1.2bn in assets and was launched in 2014.

The more expensive L&G product is seeing a downwards trend in inflows from $303.7m in Q4 2017 to $260m in Q1 2018, according to Morningstar data. In contrast, the iShares product, which has delivered better performance on the back of its cheaper fee, has seen Q1 2018 inflows grow to $854.7m from $521m in Q4 2017.

Performance of European-domiciled robotics ETFs

Hutchinson adds: “Both ETFs have an equal weight approach to companies included in the index and while this increases the investor’s chances of picking one of the positive outliers, it also minimises risk by spreading out the bets across the holdings.

“These ETFs can perform quite differently with the different sector weights as there is only a 25-company overlap between the two.”

Bubble territory

Robotic ETFs are unappealing to Sleep precisely because they are the latest hot trend.

“With thematic ETFs you are buying shares based upon a popular theme that is hot and easy to understand without any regard to valuation,” Sleep says.

“Maybe you will luck out and get in early and get out at the right time, but the chances are you are not anywhere near early. This sounds like the makings of a bubble in any other circumstances and seems destined to end in disappointment.”

First mover disadvantage

Old Mutual Wealth mutli-asset portfolio manager Rasmus Soegaard says he has modest exposure to automation and robotics through a thematic fund.

The robotics and AI sectors benefit from being secular, Soegaard says, unlike many other short term cyclical growth stories.

However, AJ Bell’s head of active portfolios Ryan Hughes says they do not have exposure to AI funds, instead preferring broad-based exposure to the technology sector.

Hughes raises concerns about picking winners in the nascent industry.

“Many of the technology companies that we have become so used to over the past 15 years have become part of our everyday lives and the AI/robotics area feels like it is much earlier stage,” Hughes says. “This makes it both exciting and volatile as the early nature of the sector means it is unclear who the winners are likely to be.

“It’s certainly an area we are very interested in and are watching it develop, however, at present we would prefer to see the space grow further and gain more depth before it warranted an allocation in addition to our more general allocation to global technology.”

According to Dan Kemp, chief investment officer for Emea at Morningstar Investment Management, robotic funds, like other thematic products, are difficult to value.

Kemp says: “Investors in these funds are therefore reliant on the fund manager selecting the right assets that both represent the theme and constitute a good investment. It is notoriously difficult to know if the manager is doing a good job as such funds cannot easily be compared to a benchmark.

“Thematic investing can also exaggerate investors’ behavioural biases as they typically rely on ‘availability’ bias to generate capital flows.”