2022 ETF Market Brief

By Bill Studebaker, CIO & President, ROBO Global 

As I inched from one day to the next throughout 2022, I kept finding myself thinking (and hoping) that the time may have finally arrived to ‘board the stock market.’ Much to my dismay, each of these brief moments of wishful thinking was met with yet another period of disappointment—and more waiting. Heading into 2023, I have reached a point of sheer weariness, and it remains to be seen if this new year will finally deliver the much-awaited cathartic flush that I and many others are wanting. Despite the hardships the year delivered, a brief look at where we are today offers a much-needed source of optimism for what may (please!) make our wishes for a more fruitful New Year come true.

On the downside, big tech’s recent fall from grace was one for the history books, with the past decade’s stock market darlings ending the year as notable laggards. Tesla (TSLA), whose ‘Cinderella ride’ saw its stock peak at $407 in November 2021, declined ~65% to hit $123 by year-end. It was a fall from grace that symbolized the sector-wide reckoning that many expect will continue into 2023. Then there was Apple (AAPL), arguably the most consistently well-loved name in tech, which came under immense pressure and ended the year down ~28%—one of the few significant drops for the company in its four-decade-long history. But there was positive news as well, with 2022 bringing important breakthroughs in automation—the sole focus of our research at ROBO Global. In artificial intelligence (AI), Dall-E and ChatGPT demonstrated the profound impacts of technology using generative AI that enables anyone to create illustrations and text at lightning speed with just a few simple instructions to a computer program. On the robotics front, pandemic-driven supply chain disruptions created a major push toward factory and warehouse automation, thrusting companies that deliver collaborative robots and adaptive-control machining into the spotlight. We believe automation continues to be one of the world’s most consistent and profitable themes.

There is likely more growth to be seen across the landscape of automation, including robotics, AI, and healthcare technology. Yes, stocks are coming off their worst year since 2008, but one of the best things about the New Year is the opportunity for a fresh slate. As evidenced by the gains across our indices, 4Q22 brought some stabilization and green shoots that may well be setting the stage for growth to come. The ROBO Global Robotics and Automation Index ETF (ROBO) rose +12.10%. The ROBO Global Artificial Intelligence ETF (THNQ) was up +3.53%, and the ROBO Global Healthcare Technology and Innovation ETF (HTEC) finished the month +6.73%. [1]

While the urgent need for innovation and the ability of companies to deliver new technologies to support it have surely been the primary drivers of this growth, other factors have also been important contributors. Though the US market has been the global crown jewel for over a decade (outperforming the rest of the world by ~4x since the 2009 trough), it is impossible to ignore the relative cheapness of international markets in today’s environment. Fortunately, our strategy at ROBO Global has never had a bias towards any specific geography, but instead has focused on identifying what we believe to be best-of-breed companies with high revenue purity. The result: our funds inherently favor global equities—a trait that may help investors cull important benefits in the year ahead. Amid skyrocketing inflation and interest rates, the rest of the world seems to have largely discounted these headwinds, and multiples have arguably troughed while the US still sits near its average P/E [2] multiple of ~17.5x. ROBO Global is poised to take advantage of this enviable position.

The key point here is that automation is, truly, everywhere.

To grasp automation’s immense growth potential, you need to ask yourself one simple question: Do I expect to see more or less automation in the future? The answer is easy. Leaders in nearly every industry are scrambling to automate whatever processes they can. And yet, as investors, we need to look closely at the difference between investing in automation and investing in technology. As we have seen time and time again, technology spending is cyclical, so it can be heavy in initial investments in a way that creates inevitable headwinds. Y2K created a pull-forward in spending and demand for information processing equipment and hardware. Covid was similar in that it pulled forward demand for work-from-home technologies, with the resulting spending for laptops, video communication, telemedicine, and more simply burning off the demand. The push for automation spending is different in that the need is not cyclical, but consistent. Companies that have a consistent need to lower costs and to improve margins may address both with automation. This magnifies the importance of automation spending, as well as its longevity.

Rather than a cyclical need, in our opinion, automation has become a must-have and permanent margin enabler—especially in three critical areas:

1) further ‘robotification’ in manufacturing,
2) automation in high-touch services businesses, and
3) the use of AI in knowledge-based industries.

We believe the benefits of automation cannot be overstated.

A study [3] of European manufacturers found that only firms with high margins to begin with saw their margins expand further after adding robots. Theoretical modeling backs that up: as robot penetration in an industry rises, a greater percentage of the sales and profits are gained by the largest, most profitable firms. In fact, a number of studies show that these robot-wielding firms crowd out the rest of their industry. Rather than disrupting the status quo, robots seem to help successful companies dig a deeper moat. Similarly, AI directly impacts industries that contribute most of the market’s free cash flow—namely knowledge-intensive businesses like software. By giving physical robots intelligence, AI builds on this equation, helping the biggest, most sophisticated firms extend their advantage. In short, we believe automation is raising the advantage of scale and helping to boost margins and extend the durability of free cash flows.

This is precisely what sets automation companies apart from most technology companies. Many of the ROBO indices constituents have extremely sturdy businesses and cash flows. As well, most have operated in developed industries—such as automotive—that have moved beyond automation exploration and are actively accelerating adoption. It is our opinion that this growth will continue to gain momentum rapidly over the next decade.

Historically, every market pullback offers an important buying opportunity for investors with capital and courage to spare. We believe automation is a prime example of that opportunity playing out in real-time today. Our goal at ROBO Global has always been to give investors access to automation companies across the supply chain that may offer uncommon potential for growth. That offering is strengthened by the ROBO ETF’s exceptionally strong financials (net cash >50%, strong margins and now a 10-15% PE discount to historical levels) and the fact that many ROBO Global customers are Fortune 100 global customersthat share the advantage of strong balance sheets that invest across all business cycles. As we enter 2023, we believe the ROBO Global ETFs remain some of the best buying opportunities for those who are ready and able to invest in automation.
 

Now is the time to turn opportunity into action—and perhaps to make your New Year’s wishes come true at last.

ROBO Top Ten Holdings, HTEC Top Ten Holdings, THNQ Top Ten Holdings

SOURCES:

[1] Source: ROBO Global®, S&P CapitalIQ, For standardized performance data current to the most recent month end, please visit www.roboglobaletfs.com.
[2] The price-to-earnings (P/E) ratio is the ratio for valuing a company that measures its current share price relative to its per-share earnings. (Source: Investopedia)
[3] Empirical Research Partners, Portfolio Strategy December 2022, Robots and Artificial Intelligence: Margin Magnifiers?

The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance data quoted. Holdings are subject to change.

This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the fund or any security in particular. Please consult your financial advisor for further information.