ROBO ETFs: Q4 Market Brief

ROBO ETF 4Q23 Commentary

If 2023 was celebrated as the Year of AI, 2024 is shaping up to be the Year of the Robot. The market still seems to underappreciate the synergy of AI and robotics. The word “Embodiment” may soon be as mainstream as “LLM” or “GPT”, which essentially means seamless blend of digital intelligence and physical functionality. Many have dreamed about being able to “download” new skills and languages - but robots can now literally do just that with skills and tasks across domains. Robot skill enhancement may accelerate robotics adoption through higher Return on Investment (ROI) across growing applications, potentially bolstering ROBO holdings strategic positioning in rapidly expanding markets.

In the fourth quarter of 2023, the ROBO Global Robotics and Automation ETF (ROBO) returned +14.3%, outpacing the Vettafi Developed World Index's +11.3%, and culminated in a +24.8% annual return, buoyed by success across all 10 subsectors. The top two performing subsectors were Business Process Automation (5.2% weighting, +25% gain), led by Dassault Systems +30.8%, ServiceNow +26.4%, PTC +23.5% and Autodesk +17.7%. This was followed by Sensing (10.5% weighting, +20.2% gain), led by Koh Young +41%, Hexagon +39.6%, Samsara +33.4% and Keyence +18.5%.

What has been heralded as sci-fi for generations has crossed the chasm into reality with the emergence of technical and financially viable humanoid robotics, with 2024 poised to see the start of large-scale production, such as the likes of the Agility’s Digit robot and Tesla’s Optimus. These robots rely on custom components, particularly in motion control mechanics, as seen in the Actuation Subsector (12.3% weighting). For example, Japan-based Harmonic Drive Systems (+33.6% return in Q4 of 2023) is already receiving orders for humanoids. Similarly, companies in the Computing and AI subsector (10.5% weighting), such as Ambarella, provide AI-designed and focused system-on-chip to allow high-performance, low power vision capabilities for robots, drones, vehicles and even static cameras.

The 4th quarter of 2023 brought its share of challenges and temporary headwinds, particularly in the largest subsector, Manufacturing and Industrial Automation (16.2% weighting, +6% return). This sector, still heavily reliant on industrial China market (though shifting more global), experienced slower growth than anticipated, with the first half of the year seeing consecutive months of contraction. Long-time holding and industry-leading robot-maker FANUC +12.8% in Q4 or 2023 shipped their millionth robot (for context, Amazon has close to 750,000 deployed).

A major leading indicator, US Manufacturing Construction, has soared 70% year over year (Y/Y) to over $200B [1] as of latest October figure. This surge, underscored by significant legislative initiatives like the Inflation Reduction Act, Infrastructure Law, and CHIPS Act, hints at a burgeoning era of high-tech manufacturing. Ironically, it's the very skilled labor shortages in critical areas like semiconductor plants that spotlight robotics as a likely long-term solution, as achieving labor-cost parity is more feasible due to higher labor turnover & costs, and net-zero sustainability objectives.

Integration subsector (6% weighting, +19.0%) leaders hold a key role in designing and maintaining smart modern systems; holdings ABB, Siemens, and Rockwell Automation are spearheading the shift of smart design and real-time control. Rockwell notably completed its acquisition of Clearpath Robotics, a leader in autonomous mobile robots, and along with Siemens each announced partnerships with Microsoft to utilize AI to further bridge Information Technology (IT) and Operations Technology (OT).

Lastly, the Logistics Automation subsector (14.5% weighting, +19.3% gain) closed out an incredible year with the strongest YTD performance, led by Symbotic (+59.1%), Autostore (+38.0%), Cargotec (+40.4%), Ocado (+30.9%) and Kardex (+18.4%). After a pandemic surge, the subsector experienced a general slowdown which has started to enter a new cycle. All 11 holdings reported a positive performance in Q4. Symbotic, known for its integration of AI and robotics in warehouse automation, grew revenue 60% Y/Y to $392M in Q4 of 2023, and saw margin expansion of 400 basis points according to Symbotic Q4 2024 earnings. Demands and complexities in the supply chain are escalating, underscoring the need for reliable solutions like Cargotec, a leader in cargo and load handling, are critical in boosting efficiency and safety in global logistics operations.

The robotics sector is currently characterized by a striking mismatch between market valuations and the array of growth drivers discussed set to likely influence both short-term and long-term prospects. Our research is pointing towards a latter half 2024 recovery setting up for a multi-year cycle coming ahead, driven by macro factors like labor shortages, aging populations, demanding capital markets, the reshoring of critical manufacturing, the energy transition and infrastructure upgrades.

HTEC ETF 4Q23 Commentary

In Q4 2023, the ROBO Global Healthcare Technology & Innovation ETF (HTEC) posted returns of 11.1%, on par with the VettaFi Developed World Index at 11.3%. The ETF saw a positive contribution from 8 of the 9 subsectors. This quarter saw 67% of the companies in the ETF beating earnings per share (EPS)[2] with a weighted average positive surprise of 12.1%. The sector is rebounding from historically low valuations, primarily influenced by the Q3 selloff, which was driven by widespread GLP-1(GLP-1 is a medication used to treat type 2 diabetes and obesity) related concerns. The current trading position at a forward 4.2X enterprise to sales EV/Sales [3], though improved, remains below the historical average of 5.1X, indicating potential room for growth.

Sometimes, innovation comes in a simpler, but game-changing package for our everyday lives. For example, in Q4 of 2023, the Medical Instruments (25.5% weighting, +10% return) subsector saw Becton Dickinson (-5.4% return) announce FDA 510(k) clearance for its MiniDraw blood collection device, enabling less invasive, fingerstick blood sampling for lab-quality tests in convenient locations like pharmacies, which then actually sees the samples run on Diagnostic subsector (21% weighting, +9.4% return) leader Siemens Healthineers’ (+14.3% return) vetted lab diagnostics technology. Lastly, in Q4 of 2023, Masimo (+33.7% return) won a major patent infringement case against Apple re: proprietary pulse oximetry tech, impacting Apple Watch sales (and could lead to a licensing agreement for Masimo in 2024, post appeal).

In Q4 of 2023, Genomics (10.6% weighting, +28.8% return) witnessed significant movements, with Twist Bioscience Corp up +81.9% in Q4. Twist Bioscience Corp beat revenue and earnings expectations partly due to the launch of Express Genes, which aims to tap into the market of organizations currently producing their own DNA due to time constraints—an estimated $1.4 billion market according to FactSet Data. The genomics sector also boasted strong Q4 performances from CareDx Inc (+71.4% return), Natera (+41.6% return), and Veracyte Inc. (+23.2% return). Natera notably won yet another patent infringement case against yet another firm, NeoGenomics.

Precision Medicine in Q4 of 2023 (12% weighting, +6.8% return), in our opinion brought forth one of the key success stories in the history of medicine, with Vertex (+17.0% return), achieving not one but two groundbreaking milestones. In December, Vertex, in partnership with CRISPR Therapeutics (CRSP), received FDA approval for the first CRISPR treatment in the US, Casgevy, as a single-shot, gene-editing cure for sickle-cell disease. The company also saw pipeline candidate VX-548, a non-opioid pain medication, clear a phase two medical trial, which could pave the path for a much-needed alternative to the addictive opioid class across peripheral nerve injuries, chronic pain, and acute post-surgical pain. Meanwhile, in Q4 of 2023 Moderna’s (-3.7% return) RNA cancer vaccine showed a 50% reduction in reoccurrence or death in Melanoma when paired with Merck’s Keytruda according to Moderna & Merck.

Process automation (14.6% weighting, +15.1% return), the third-largest sector, showed positive normalization across holdings, led by Azenta +29.8%, Medpace Holdings +26.6%, Charles River Laboratories +20.6%, Tecan Group +20.7% and Eurofins Scientific +15.0%. Notably, Charles River received a world-first FDA and European Medicines Agency (EMA) regulatory clearance to be the first CDMO to manufacture Vertex’s Casgevy according to FactSet Data.

All in all, this quarter saw solid earnings beats, successful clinical trial updates, the start to a new era of precision medicine, and other independent and interconnected, positive developments that showcase the world’s leading healthcare technology and innovation.

THNQ ETF 4Q23 Commentary

In the final quarter of 2023, the ROBO Global Artificial Intelligence ETF (THNQ) achieved a +21.3% return, notably outperforming the Vettafi Developed World Index, which saw an increase of +11.3%. Full-year 2023 saw a +57% return, the second-best annual performance since inception, after what had been a tougher 2022 for high-growth technology leaders. AI dominated headlines in 2023 and we saw adoption of generative AI tools by hundreds of millions worldwide. The world is exiting the first stage of the initial “Graphics Processesing Unit (GPU) acquisition frenzy” and “testing phase” into the larger “inference phase”, otherwise known as live deployment (beyond “simple” text-based consumer interfaces such as ChatGPT).

All subsectors posted positives gains, which alongside a strong earnings season saw major product announcements across the board. According to FactSet numbers, in the latest earnings season, 92% of holdings were profitable, and saw 88% of holdings beat expectations with a weighted average earnings per share (EPS)[2] of +54% and sales of +11.85%, with an average positive surprise of +2% and +22.5%, respectively. This appears to not only underscores the current robustness of the overall AI ecosystem but also aligns with both our research and consensus forecasts for sustained acceleration in the upcoming years, versus an overall potentially declining market.

Network and Security (16% weighting, +26.3% gain), saw continued strength and resilience, seeing upwards revisions across the board, led by Crowdstrike +52.5%, Varonis +48.2%, Snowflake +30.3%, and Arista Networks +28.0%. In our opinion, the importance of securing, analyzing, and moving data as more elements become automated cannot be understated. If we cannot trust the systems that will automate our world to run reliably 24/7 without issues, AI will likely not develop to its full potential.

AI-focused Semiconductor leaders (22.7% weighting, +24.8% gain) rebounded from a tough (-12%) Q3. Leaders such as Advanced Micro Devices (+43.4%), Taiwan Semiconductor (+19.8%), Global Unichip (+34.1%) and MediaTek (+45.3%) have continued recent outperformance against NVIDIA (+13.9%). Powerful, open-source, and less GPU-demanding Large Language Models (LLMs) are catching up to models from the likes of OpenAI, providing a counterforce to big tech. We see players strong in connectivity and high-power, low-energy AI-enabling computation, such as latest rebalance addition Qualcomm, in prime positioning going into 2024.

In Q4 of 2023, Big Data / Analytics (11.1% weighting, +17.1% gain) saw its third takeout via acquisition with the acquisition of Alteryx (+25.1% return) for $4.4B, led by Clearlake Capital Group and Insight Partners. There have now been 17 takeouts since inception via M&A. In Q3 of 2023 other subsector holdings include Datadog (+33.3% return), added in Q3, and MongoDB (+18.2% return) each showcased strong earnings, customer adoption and pricing metrics as we see the data layer taking a more prominent role in the near-term AI stack of enterprises and governments around the world.

We believe the broader AI ecosystem stands on the cusp of re-inventing and improving the world. Investment and deployment of AI technologies are rapidly solidifying, possibly promising transformative impacts across diverse industries, regulatory landscapes, and global markets. The future is not just driven by AI but is interwoven with a complex and necessary network of supporting technologies that will adapt and change over time.

SOURCES & DEFINITIONS:

1 Manufacturing Construction https://www.census.gov/construction/c30/pdf/release.pdf
2 Earnings per share (EPS) is a company’s net profit divided by the number of common shares it has outstanding.
3 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.

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.