ROBO ETFs: Q3 Market Brief

AI, Robotics & Health Tech ETFs: Q3 Market Insights Artificial Intelligence ETF THNQ

Nearly two years after ChatGPT's public launch, the gap shrinking between AI ideation, invention, and deployment is evident. While individual behavior can change rapidly, our perception of this change often lags, mired in skepticism. Hundreds of millions, if not billions, already use AI, knowingly or not—a technological bar that rises swiftly yet quickly becomes commonplace. Amidst abundant projections of AI's impact, we're witnessing a real-time shift: from technology built by humans for humans, to AI-driven systems and infrastructure, like computer vision and resilient connectivity, crafted for both machines and people. This evolution is forging an entirely new tech stack, with established industry leaders at the helm of this transformation. 

Q3 2024 saw the ROBO Global Artificial Intelligence ETF THNQ deliver a modest +2.7% return, marking a shift in performance patterns compared to the previous 12-24 months. Six of the eleven subsectors posted positive returns, reflecting a changing landscape. According to FactSet Data, the Q2 2024 earnings season was remarkably strong, with 93% of holdings beating Earnings Per Share (EPS) expectations and 84% surpassing sales forecasts. The average earnings surprise was an impressive 18.5%, while sales surprises averaged 1.9% (weighted average, FactSet consensus for Q2 2024). We believe robust performance underscores the sector's resilience and growth potential despite the muted price action. 

The Ecommerce Subsector emerged as a standout performer (+22.5%), driven by strong gains from JD.com (+54%) and MercadoLibre (+26%), which serve as key AI and automation gateways for China and Latin America, respectively. Shopify also posted impressive growth (+20%), while Amazon (-3%) was the segment's only underperformer. The Healthcare subsector (+18.2%) showed significant promise, with Veracyte (+55.8%) and Illumina (+25%) delivering solid updates and earnings beats. This performance suggests a potential reversal in healthcare valuations, which have been relatively depressed in recent quarters. 

The Business Process subsector, the third largest in THNQ, posted modest gains (+6.1%), with mixed performance among its constituents. Samsara (+41%) and Fair Isaac (+29%) continued their upward trajectory, while B2B SaaS players like JFROG (-22%), HubSpot (-9.1%), and Adobe (-7.2%) faced headwinds. Notably, the Cognitive Computing subsector, despite its smaller overall position, delivered impressive returns (+30.0%). This was largely driven by significant gains from industry titans IBM (+28.5%) and Tesla (+31.6%), both of which continue to make strides in their respective AI initiatives. 

The Semiconductor (-7.0%) and Network and Security (-4.4%) subsectors experienced a correction this quarter, following two years of robust performance. In Network and Security, Crowdstrike's notable glitch, while causing short-term volatility, doesn't diminish our conviction in its role as a leader in AI cybersecurity - a critical component in an increasingly automated world. Despite Pure Storage's retraction (-22.4%), in our opinion, its best-in-class innovation and expanding end-markets maintain our positive outlook. Similarly, in the Semiconductor space, industry pillars like ASML (-19.2%) and Lam Research (-24%) faced headwinds, but their crucial role in AI advancement and projected growth appear to underscore their long-term potential. This normalization may present attractive entry points for investors looking to capitalize on the AI revolution. 

The most transformative AI opportunities in automation, innovation, and societal efficiency are still emerging. THNQ provides exposure to a diverse ecosystem of AI leaders across multiple sectors, many of whom are already profitable but poised for further growth as AI adoption accelerates. As AI continues to reshape industries and daily life, the strategy is positioned to reflect the broader impact of this technological shift.

While AI's most significant impacts are yet to be realized, we believe THNQ is well positioned for an AI-augmented future. Many constituents are already profitable leaders in their categories and are expected to see increased utilization. This juncture presents an opportunity to invest in AI before its full potential is priced into the market.
 

Robotics and Automation ETF ROBO

The ROBO Global Robotics and Automation ETF ROBO returned 5.6% during the third quarter of 2024. The Robotics space overall has still underperformed over the past year, due to a mix of megacap divergence as well as a lag in end-market. As an example, Omnicell, one of the top performers of the quarter (+58.9%), trades as 1.8x Forward EV/Sales and is still down 4% Y/Y at the end of Q3. Similarly, many German (+12.4%) companies in the portfolio also trade at relatively low valuations, albeit with slower and steady revenue growth, such as Duer (+17%) which trades at 0.45x Forward EV/Sales and 2.45x Forward P/E.

This complex landscape of valuations and performance within the robotics sector suggests potential opportunities as the market recovers. The sector is currently experiencing a lag between new robotics deployments and ongoing revenues, including factors such as the election year, pull-through from end markets, record high manufacturing construction in the US, and the emerging benefits and applications of AI in robotics.

Q3 2024 saw notable developments across various aspects of the robotics sector. Japan constituents, representing 20.7% of ROBO, were up 7.8% for Q3, demonstrating resilience despite temporary market fluctuations. The initiation of interest rate reductions bodes well for the capital-intensive robotics space, with potential post-election clarity likely to amplify this positive effect. Technological advancements continue apace, with ongoing development in humanoid and autonomous mobile robotics across various applications. Major players are also entering the field, exemplified by Apple's reported internal launch into home robotics. It's worth noting that while ROBO includes many recognizable brands, it also comprises numerous "behind-the-scenes" players that contribute significantly to the sector's value and innovation.

The Sensing Subsector (+17.1%) exemplifies the strength and diversity within ROBO. It includes rising stars like Samsara (+41%), which excels in physical automation tracking, alongside established Japanese companies such as Omron (+40.3%) and Keyence (+13.7%). These firms provide crucial industrial automation sensing solutions, playing a vital role in empowering manufacturing and automation processes worldwide. Their strong performance underscores the growing importance of advanced sensing technologies in the global robotics and automation landscape.

Computing and AI, the weakest subsector this quarter (5.1%), experienced a cooling of period for some of its recent high performers. Companies like Microchip (-11.6%), Qualcomm (-14.3%), and Cadence Design Systems (-10.9%) saw a slowdown after nearly two years of strong AI-driven momentum since the Q3 2022 low. This shift suggests a more diverse pattern of returns emerging within the sector. Notably, even industry leader NVIDIA (-1.7%) found itself in the bottom third of performers, indicating a potential rebalancing of growth across the AI and computing landscape.

ROBO's Q2 earnings season delivered positive surprises on both top and bottom lines. However, overall year-over-year earnings per share declined by 7.7%. Despite this, full-year EPS estimates remain optimistic at +8.6%, with expectations of a stronger Q4 to end the year (based on FactSet Data as of 9/30/24). Looking further ahead, projections indicate a robust 20.7% sales growth in 2025 (based on FactSet Consensus Weighted Average as of 27 September 2024). Notably, the portfolio's profitability profile is set to improve, with the percentage of profitable companies in the ETF expected to increase from 95% in 2024E to stability. (based on FactSet Data as of 9/30/24)

The late-quarter rebound in China has primarily benefited larger tech players, but the effects of stimulus measures are expected to spread to the broader economy, potentially boosting companies with Chinese exposure, including many of our Japanese constituents. ROBO's recent addition of Hon Hai Precision Industry (commonly known as Foxconn), with an estimated 75% of its operations in China, reflects this trend. However, Foxconn's expanding automation capabilities in countries like India and Vietnam also highlight a. broader shift towards diversifying manufacturing bases, a development that could reshape the robotics and automation landscape in Asia.

We believe the manufacturing cycle has reached its nadir, signaling potential upside for our largest subsector and tech areas such as Actuation. According to FactSet Data, while projections for full-year 2024 show year-over-year sales declines for 27 out of 78 holdings, the outlook for 2025 is significantly more favorable. According to FactSet Data, as of 9/30/24, only three holdings are expected to see declining sales in 2025, with the overall ETF anticipated to achieve 10.6% sales growth. This forecast underscores our confidence in the sector's recovery and growth potential.

Looking ahead, numerous promising applications are on the horizon, with immediate catalysts emerging in semiconductor and energy manufacturing. However, current valuations do not yet fully reflect this potential, presenting what we believe to be attractive long-term opportunities as this new cycle unfolds. Importantly, the impact of AI on robotics is still in its early stages and should not be underestimated. As this synergy develops, it could drive significant innovation and growth in the robotics sector, potentially reshaping the industry landscape in the coming years.

Healthcare Technology and Innovation ETF

The“Attribution by ETFCategory”, based on data from VettaFi research and FactSet Data shows the average weight (Avg. Wgt), return, contribution, and currency impact for different categories within the healthcare technology ETF(HTEC). These categories include Robotics, Precision Medicine, Genomics, Regenerative Medicine, Diagnostics, Medical Instruments, Process Automation, Data Analytics, and Telehealth. Past performance is no guarantee of future results. 

The “Earnings Analysis” chart, based on data from VettaFi research and FactSet Data, provides insights into past earnings performance and future expectations, including EPS growth, sales, EBITDA, and profitability trends for various sectors for the holdings of HTEC. 

“EV/Sales” chart based on data from VettaFi research and FactSet Data 

The ROBO Global Healthcare Technology and Innovation ETF returned 8.96.% over the quarter. The performance was fueled by strong earnings growth, with 76% of companies exceeding Earnings Per Share (EPS) estimates by a weighted average of 22.35%. Additionally, 77% of companies reported positive year-over-year sales growth, highlighting the overall strength of the sector. (According to FactSet Data as of 9/30/24)

This quarter marked the strongest performance of the year and the second-best since Q2 2021. Key drivers included exceptional gains from CareDx (+91.24%), Axogen (90.47%), and Omnicell (58.92%). The industry's ongoing de-risking and repositioning efforts throughout the year further contributed to the positive ETF performance. While visibility into 2025 remains limited, current valuations and estimates suggest a cautiously optimistic outlook.

The diagnostics segment emerged as the top performer, rebounding from a challenging year. Exact Sciences stood out, kicking off the quarter with a strong Q2 adjusted EBITDA that surpassed expectations, fueled by continued momentum from their Cologuard product. In September, they further cemented their position by announcing promising data from a study suggesting their blood test could compete effectively with Guardant Health's recently FDA-approved Shield test.

The genomics segment continued its strong performance in 2024, with CareDx leading the charge in its recovery towards pre-COVID valuations. The company's impressive 91.9% increase this quarter built on its successful Q1 rally. Management raised guidance for both revenue and losses in their Q2 results, and they also announced the restoration of long-term Medicare coverage for their key products – AlloSure®, AlloMap®, and HeartCare®. Additionally, Natera exceeded expectations with impressive Signatera volume growth, significantly exceeding historical averages.

In other Key Developments, Vertex Pharmaceuticals received FDA acceptance for a new non-opioid pain medication, marking the first new class of medicine for acute pain in over two decades. Launch is expected in January 2025. In Robotics, Stryker completed the acquisition of care.ai, a company specializing in AI-powered healthcare IT solutions. This move strengthens Stryker's offerings in wirelessly connected medical devices and healthcare IT.

The Medical Instruments sub-segment continued to face challenges from budget pressures. Dexcom experienced a significant 41% decline after slashing guidance due to a poorly executed sales force restructuring. However, the company remains optimistic about a turnaround by 2025, and their launch of the first OTC Continuous Glucose Monitoring system presents an intriguing market opportunity.

The precision medicine segment saw a reversal of fortunes for Moderna. The company lost all its year-to-date gains and currently sits 40% down, following reduced estimates and cuts to their R&D initiatives, which the market perceived as overly ambitious. Despite these setbacks, Moderna maintains a robust pipeline in respiratory diseases and aims for ten product approvals by 2027.

Finally, while formal updates on 2025 are still months away for many companies, some positive signs are emerging. Royal Philips finally reported normalized lead times across all modalities, suggesting a potential easing of supply chain pressures that have plagued the industry. However, Charles River management highlighted ongoing restructuring efforts within global biopharma companies, leading to pipeline prioritization and cutbacks. These contrasting trends paint a picture of an improving environment with cautious management outlooks.

SOURCES & DEFINITIONS:

1. Earnings Per Share (EPS) is a company’s net profit divided by the number of common shares it has outstanding.
2. The Global Purchasing Managers' Index (PMI) measures the month-to-month change in economic activity within the manufacturing sector.
3. The Forward Price-to-Earnings (Forward P/E) ratio compares a company’s current share price to its expected per-share earnings. The formula is Forward P/E = Current share price / Estimated future earnings per share.
4. The Enterprise Value to Sales (EV/Sales) ratio relates a company’s enterprise value (EV) to its total revenue or sales. The formula is EV/Sales = Enterprise Value / Total Sales
5. The weighted average growth (WAG) is calculated by multiplying each data point by its assigned weight and then dividing the sum of these weighted values by the total number of data points
6. EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It’s an alternate measure of profitability to net income.

Fund holdings and standard performance can be found here: https://www.roboglobaletfs.com/robo, https://www.roboglobaletfs.com/thnq & https://www.roboglobaletfs.com/htec. 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. Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index.

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.