ROBO ETFs: Q1 Market Brief
ROBO Index 1Q24 Commentary
March 31, 2024
The Year of the Robot continues to progress, and we are witnessing remarkable advancements in robotics training almost daily. At the recent NVIDIA GTC conference in March 2024, NVIDIA CEO Jensen Huang highlighted robotics and physical automation as one of the most compelling opportunities of our time.
The ROBO Global Robotics and Automation Index returned +2.0% in Q1 2024 compared to the VettaFi Full World Index’s 8.2% return, led by Computing and Artificial Intelligence (+9.9%). The Integration subsector (6% weighting) saw a +5.8% gain led by Mitsubishi Electric (+20.0%) and Schneider Electric (+12.8%), both seeing gains from electrification. Additionally, Rockwell Automation (5.9%) saw NVIDIA join their Rockwell Automation Partner Network.
Overall, fundamentals are still tracking in the same direction as the prior quarter, with an expected 2H 2024 recovery in core markets. In Q4 2023, earnings reflected a rare decline in sales (-0.35%) and earnings per share (EPS)[3] (-2.0%), which just slightly beat expectations. We are in the "eye-of-the-robot storm" right before key industries recover and the new appears. Most recently, indicators are beginning to pivot favorably, as evidenced by the latest PMI data. Manufacturing and Industrial Automation (16% weighting) saw modest 3% gains led by Daihen (+35.2%), Yokogawa (+22.3%), and Emerson Electric (+17.0%) all saw significant revenue and net income beats vs FactSet Estimates. The former two are also experiencing positive uplift from a robust Japanese market.
China, the largest robotics market, experienced a significant slowdown in demand during 2023. However, the country's leadership has recently reaffirmed its commitment to prioritizing equipment modernization, potentially allocating hundreds of billions annually [1] and setting a target to grow from ~3802 to 500 robots per 10,000 workers by 2025 [2]. To put this into perspective, the global manufacturing sector is a $10 trillion plus market, providing employment to an estimated 300-400 million individuals. As the robotics revolution gains traction globally, we anticipate future growth in the industry to become more geographically distributed, with nations around the world recognizing the potential of automation and investing in their own robotics infrastructure.
As we shift our focus to the mid and long-term horizon, it becomes increasingly evident that the traditional perspective of analyzing robot density solely through the lens of manufacturing will become an outdated perspective and will shift towards a perspective encompassing a percentage of all sectors with physical labor and of global gross domestic product. Our projections indicate that the Total Addressable Market for robotics has the potential to grow more than fivefold by 2033, underscoring the vast opportunities arising from surging demand in various sectors, including services, construction, warehousing, autonomous transportation, healthcare, and even household applications.
THNQ Index 1Q24 Commentary
March 31, 2024
The ROBO Global Artificial Intelligence Index THNQ delivered a 7.1% return for Q1 2024, slightly underperforming the VettaFi Full World Index’s 8.20% return. Overall, it’s clear the market is now in a more tempered “wait-and-see” for artificial intelligence (AI)-related revenues and business moats to appear. This is the start of a paradigm shift of business models that are turning towards “AI-to consumer” and “AI-to-enterprise” and the accompanied rise of supporting infrastructure.
The Semiconductor sector (+13.8%) continued to outshine, driven by unabated demand for AI chips. NVIDIA reignited performance boosters with +86.9% performance, driven by large upward revisions and strong demand and followed by other key AI-semi enablers AMD (+20.7%), ASML (+28.5%), Lam Research (+23.7%), and TSMC (+27.4%). At Consumer Technology Association this year, companies like Ambarella (-9.1%) unveiled groundbreaking chips capable of on-device Large Language Models (LLMs) for computer vision applications, an area slated to see incredible growth as real-world use cases expand. Similarly, Qualcomm (+7.3%), an addition from the quarter prior, recently introduced its XR2 Gen 2 chip for augmented reality.
The Network & Security sector (+9.6%) was propelled by scalable data-storage pioneer Pure Storage (+46.0%), which is experiencing surging demand and heightened expectations for its crucial role in supporting AI and machine learning technologies across data preparation, training, and inference. In the Business Process sector (+9.2%), Nice Limited (+30.6%), JFrog (+27.8%), and Fiserv (+20.3%) led with robust fundamental performance. Adobe (-15.4%) disappointed investors with its latest earnings and AI outlook, which may have been overambitious. Adobe remains a frontrunner in the ever expanding creative and digital economy. CoStar Group (+10%), a global real estate technology company leveraging AI for data analysis, is seeing positive tailwinds following the resolution of the lawsuit involving the National Association of Realtors (NAR) and their 6% fee practices eliminated.
The Big Data / Analytics sector (-4.3%) was the quarter's biggest underperformer, a stark contrast to its +70.0% gain in 2023. As businesses scale their AI solutions, we anticipate this segment to gain significant importance, with observability platforms becoming an integral part of operations, not only for performance but also for transparency and explainability, aligning with recent AI regulation trends in both the EU and USA.
In our Consumer subsector (+19.1%), Spotify surged +40.4% following a substantial win against Apple (not a THNQ constituent) with a 1.8B euro antitrust fine, which could be the start of further similar headwinds for Apple, including other antitrust issues. For Spotify, this victory may be the tip of the iceberg, unlocking additional services-related revenue opportunities and potential for margin expansion.
HTEC Index 1Q24 Commentary
March 31, 2024
The healthcare industry kicked off 2024 with its premier event, the J.P. Morgan Healthcare Conference. While the conference offered its usual mix of deals and pre-announcements, the biggest buzz surrounded artificial intelligence (AI) in healthcare. This was evident by the packed house at the Nvidia GTC conference. Overall, the sentiment leaned towards a year of greater stability. With fewer unknowns, the industry seems poised to experience some relief from budgetary and logistical pressures.
In Q1 2024, the ROBO Global Healthcare Technology & Innovation (HTEC) underperformed the VettaFi Full World Index with a return of 1.25% vs 8.2. This quarter saw 66.7% of the companies in the index beating EPS [3] expectations with a weighted average surprise of 4.5%. The index is trading 4.35x Enterprise Value to Sales (EV/Sales) [4], tracking close to the bottom of the COVID pandemic’s 4.37x and below the historical average of 5.9x, offering a compelling valuation, with significant upside potential.
This March, Intuitive Surgical (+18.6%), from the Robotics subsegment, was granted Food and Drug Administration approval for the fifth generation of its multiport da Vinci robot, marking the culmination of over a decade of research. The DV5 replaces the current Xi system and has received clearance for a wide array of indications, introducing significant advancements in robotic surgery technology. Big moves in Process Automation (+8.7%) this January. Lonza Group (+40.7%) announced their acquisition of one of the world's largest biologics manufacturing sites in California from Roche for $1.2 billion. This strategic move will immediately boost Lonza's production capacity, benefiting customers and fueling future growth in their Biologics division. Another deal in the subsector was the announced acquisition of Catalent (+25.7%) for $16.5 billion by Ozempic maker Novo Nordisk.
Genomics saw Natera (+44.4%) continue its impressive growth trajectory with their Signatera technology, a blood test for cancer cells, gaining momentum in US cancer centers, paving the way for liquid biopsies to become a standard part of cancer diagnosis. Regenerative Medicine (+17.6%) welcomed United Therapeutic as the newest addition to join the ranks of Artivion (+20.9%) and Axogen (+13.8%). The company founded by its CEO to find a cure for her daughter’s then untreatable disease, is now setting its sights on a groundbreaking goal: lab-grown organs. This technology has the potential to revolutionize the entire healthcare industry.
Despite a slow start, 2024 remains slated to be both a year of recovery for much of the portfolio and a year of great expectations and delivery on novel healthcare innovation. Estimated growth is very healthy across EPS [3] and Sales this year and is expected to accelerate in 2025 and beyond (according to consensus estimates).
SOURCES & DEFINITIONS:
1 https://english.www.gov.cn/policies/policywatch/202403/25/content_WS6600b411c6d0868f4e8e56a2.html
2 https://www.automationmag.com/ifr-robotics-adoption-densityglobal/#:~:text=North%20America's%20robot%20density%20is,density%20stands%20at%20198%20units
3 Earnings per share (EPS) is a company’s net profit divided by the number of common shares it has outstanding.
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
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.
Carefully consider the Funds’ investment objectives, risk factors, charges and expenses before investing. This and additional information can be found on the Funds' full or summary prospectuses, which may be obtained at www.roboglobaletfs.com. Read the prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. International investments may also involve risk from unfavorable fluctuations in currency values, differences in generally accepted accounting principles, and from economic or political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments and investments in smaller companies typically exhibit higher volatility. There is no guarantee the funds will achieve their stated objective. ROBO, HTEC, and THNQ are non-diversified.
The liquidity of the A-shares market and trading prices of A-shares could be more severely affected than the liquidity and trading prices of other markets because the Chinese government restricts the flow of capital into and out of the A-shares market. The funds may experience losses due to illiquidity of the Chinese securities markets or delay or disruption in execution or settlement of trades.
The risks associated with investments in Robotics and Automation Companies include, but are not limited to, small or limited markets for such securities, changes in business cycles, world economic growth, technological progress, rapid obsolescence, and government regulation. Robotics and Automation Companies, especially smaller, start-up companies, tend to be more volatile than securities of companies that do not rely heavily on technology. Rapid change to technologies that affect a company's products could have a material adverse effect on such company's operating results. Robotics and Automation Companies may rely on a combination of patents, copyrights, trademarks and trade secret laws to establish and protect their proprietary rights in their products and technologies. There can be no assurance that the steps taken by these companies to protect their proprietary rights will be adequate to prevent the misappropriation of their technology or that competitors will not independently develop technologies that are substantially equivalent or superior to such companies' technology.
The risks associated with Artificial Intelligence (AI) Companies include, but are not limited to, small or limited markets, changes in business cycles, world economic growth, technological progress, rapid obsolescence, and government regulation. Rapid change to technologies that affect a company’s products could have a material adverse effect on such company’s operating results. AI Companies also rely heavily on a combination of patents, copyrights, trademarks and trade secret laws to establish and protect their proprietary rights in their products and technologies. There can be no assurance that the steps taken by these companies to protect their proprietary rights will be adequate to prevent the misappropriation of their technology or that competitors will not independently develop technologies that are substantially equivalent or superior to such companies’ technology. AI Companies typically engage in significant amounts of spending on research and development, and there is no guarantee that the products or services produced by these companies will be successful.
The risks associated with Medical Technology Companies include, but are not limited to, small or limited markets for such securities, changes in business cycles, world economic growth, technological progress, rapid obsolescence, and government regulation.
Diversification may not protect against market risk.
Beginning September 2, 2020, market price returns are based on the official closing price of an ETF share or, if the official closing price isn't available, the midpoint between the national best bid and national best offer (“NBBO”) as of the time the ETF calculates current NAV per share. Prior to September 2, 2020, market price returns were based on the midpoint between the Bid and Ask price. NAVs are calculated using prices as of 4:00 PM Eastern Time. The returns shown do not represent the returns you would receive if you traded shares at other times.