ROBO ETFs: Q2 Market Brief

ROBO Index 2Q24 Commentary

June 30, 2024

Overall, the ROBO Global Robotics and Automation ETF saw a -5.6% return for the second quarter of 2024, underperforming the Vettafi Full World Index (VFWI) return of 2.87%, with only two of the eleven subsectors positive: Computing and Artificial Intelligence (AI) (+8.58%) and Integration (+2.80%).

The decade ahead is shaping up to be defined by personal AI assistants and robotics, alongside breakthroughs in extended reality, climate tech, and biotechnology. We're witnessing an unprecedented fusion of digital intelligence with our physical world, potentially transforming every aspect of how we live, work, and interact. We believe the convergence of AI, Robotics and Energy innovation is the technology stack of our future.

Reflecting on the latest earnings season, the Robotics sector overwhelmingly saw year- over-year declines in Earnings Per Share (EPS) ]1] (-11.8%) and sales (-1.45%) on a weighted average basis, with 61.6% beating Earnings Per Share (EPS) [1] and 67.6% beating sales estimates. Ultimately, this was unsurprising due to 14 months of negative Global Purchasing Managers' Index (PMI) [2] and slower growth in China.

Despite mixed performance, with 91% of reporting companies profitable, earnings commentary analysis shows signs of a recovery in core markets during the second half of the year., with consensus estimates currently aimed at 5.2% sales growth and 7.0% Earnings Per Share (EPS) [1] growth in 2024 with a 2025 ramp up to 9.5% sales and 21.3% Earnings Per Share (EPS) [1] growth (Factset, Weighted Avg. as of June 28, 2024).

Automation in Agriculture, which works to feed over 8 billion people worldwide, is seeing incredible adaptation to AI to streamline operations, increase energy efficiency, and hyper- target seeding, weeding, and increasing picking, crop observation, and newer methods to support crop health. Additionally, robot arms and other automated solutions are increasingly being used to prep and cook foods.

In the Logistics subsector (-12.72%) GXO Logistics (-6.06%) announced an industry-first multi-year, commercial collaboration with Agility Robotics (private) Digit humanoid robot. Cargotec (+17.49%) spun out as part of a well-received demerger into two separate operating entities at quarter-end, Kaimler and Hiab, which operate in marine cargo handling and on-road load handling, respectively.

To those wondering how AI is already and currently impacting the robotics space, ROBO offers companies involved in manufacturing/inspecting semiconductor components, which are increasingly seeing automation beyond fabrication itself into less-automated areas (such as Apple looking to improve reliability across newer manufacturing regions through increased automation), including Teradyne (+31.51%), which offers chip inspection technologies. We continue to expect a “rising tide” scenario for companies providing underlying robotics technologies.

Additionally, many companies support the energy scale-out required by the energy transition, electrification, and growing data center demands, such as Delta Electronics (+13.74%), which enhances energy efficiency and enables smart automation within these facilities by providing advanced power electronics and automation solutions. Recent Q2 rebalance additions, such as Nvent Electric and Celestica, further emphasize this trend. Much of the energy transition requires increased robotic-enabled manufacturing capacity, key to the Manufacturing and Industrial Automation subsector, with companies like Emerson Electric (-2.56%), Yokogawa Electric (+4.75%), Yaskawa Electric (-14.3%), and companies in the Integration subsector leaders Schneider Electric (+7.37%) and Mitsubishi Electric (-3.84%). Remember this – more robots likely means more energy, and vice versa.

The ROBO ETF, on an ETF aggregate basis, saw its forward P/E [3] decline from ~42.6x at the beginning of the year to 38.2X (Factset and Vettafi data, as of 6/28/2024), below the 5-year 43x average. Meanwhile, forward EV/Sales [4] are closer to longer term average, at 3x. Our perspective remains that blue chip robotics companies are on discount, and that we are at the precipice of a new mass adoption cycle of robotics across society.

We believe that these blue-chip robotics companies are undervalued, presenting a prime opportunity as we approach a major mass adoption cycle. The robotics sector is at a pivotal inflection point, driven by structural and geopolitical advantages and breakthroughs in AI and energy. These advancements are enhancing capabilities and fueling demand, creating a virtuous cycle poised for substantial growth.

NVIDIA +36.7% / +0.97%

Nvidia continues to draw both revenue and earnings growth and optimistic long-term expectations from the markets as the premier provider of AI chips and related technologies. Demand for NVIDIA Graphic Processing Units (GPUs) across the globe continues to grow as data-center investment game theory story continues to play out. NVIDIA remains the most expensive on a Forward EV/Sales [4] basis of 24.8x, more than 2.5x the ETF average.

Teradyne +31.51% / +0.57%

Teradyne, which provides automated semi and wireless testing as well as industrial automation and collaborative robotic solutions through their Mobile Industrial Robots (MiR) and Universal Robot divisions, continues to see current strength in their larger testing division which is tied to the increase in high-end AI chips.

Globus Med Inc. +27.68% / +0.29%

Global Med, a medical device company focused on development of commercialization of custom musculoskeletal implants and surgical tools, recently saw clearance into the $15B reconstructive orthopedic market with 510k clearance from the FDA for their ExcelsiusFlex orthopedics robot for Total Knee Arthroplasty, adding a growth area beyond their strong spinal surgery portfolio which includes the ExcelciusGPS and Pulse platforms, the latter of which was brought on board with their $3.1B acquisition of Nuvasive in 2023.

Autostore -35.95% / -0.62%

AutoStore, a leading provider of automated storage and retrieval systems, reported Q1 2024 revenue of $138.1 million, a 7.4% decline from the previous year, despite strong order intake growth of 11.4% year-over-year. The underperformance was primarily due to cautious investment behavior among consumer-oriented businesses, but the company remains optimistic with a forecasted annual revenue growth of 11.3% and recent accolades including the "Order Fulfillment Solution of the Year" award by SupplyTech Breakthrough Awards. Additionally, they have been working to expand their customer base and operations in North America. Lastly, recurring revenue, primarily software and spare parts, represents around 10% of total revenues.

Koh Young -35.28% / -0.50%

Koh Young, a leader in 3D inspection technologies for the semiconductor industry and electronics, saw sales growth decline 19% year over year (Y/Y) for the first quarter of 2024, with challenging macroenvironment in-line with the market. The company is expected to return the growth with full year expected 3.8% revenue growth and acceleration to 15.7% forecast for 2025. Additionally, Koh Young aims to launch a neurosurgical robot guidance system in 2025 in the US.

Ocado Group PLC -31.60% / -0.36%

Ocado Group is a British online grocery solutions provider known for its automated warehouses and e-commerce platforms. In their latest earnings season, Ocado reported a decline in profitability due to rising operational costs and significant investment in technology, with revenue growth falling short of expectations. Additionally, the company has faced setbacks as two of their major partnerships have stalled, raising concerns about their growth strategy. Ocado was taken out of the ETF at the latest Rebalance.

THNQ ETF 2Q24 Commentary

During 2Q 2024, the ROBO Global Artificial Intelligence ETF (THNQ) saw a +2.6% return, roughly in-line with the Vettafi Full World Index (VFWI) return of +2.87%, with 6 of the 11 subsectors in the positive, led by performances in the Semiconductor (+16%), Network & Security (+12.6%), Consumer (+13.7%), and Cloud Providers (+5.2%) subsectors. Offsetting performance came from declines in Big Data / Analytics (-1.61%), Ecommerce (-5.92%), Business Process (-7.16%) and Healthcare (-31.61%) subsectors.

In our opinion, the AI race is intensifying, with even market leaders at risk if they fail to adapt. AI technology is progressing rapidly. For example, we now have “text-to-app” capabilities emerging which utilize Large language models (LLM’s) for contextual understanding, coding and debugging. In the LLM space, THNQ member Microsoft-backed OpenAI faces stiff competition from THNQ ETF members like Alibaba (QWEN2) and Alphabet (Gemma 2), which are topping leaderboards. Speaking of Alphabet, their Waymo One autonomous ride hailing launched in San Francisco to the public – heralding the start to an era where autonomous vehicles more resemble an extension of “public transit”. While megacaps dominated Q2 2024, we believe their valuations largely reflect future “AI potential” and discounts competitive and regulatory dynamics.

Of course, AI extends beyond any single company, as reflected in the THNQ ETF 's diverse composition. Emerging "human-first" regulations are reshaping AI implementation across industries, contributing to a market tipping point where the THNQ ETF may offer a more balanced approach to AI exposure compared to individual tech giants facing increasing technical and regulatory risks.

While NVIDIA (+36.7%) has remained the “spice of AI”, referencing Frank Hurbert’s Dune, the key differences are that unlike the spice in Dune, NVIDIA is dependent on a web of underlying technologies and enablers in the Semiconductor subsector like Lam Research (+9.7%), ASML (+5.6%), Taiwan Semiconductor (+22.7%), and Analog Devices (+15.7%), and that the largest buyers (hyperscalers) were not able to create their own and there was no competitive substitutes like Qualcomm (+18.0%) or Global Unichip (+30.3%).

Meanwhile, high expectations led to some declines among companies that had overall solid earnings numbers and forecasts. The THNQ ETF saw 92% of companies beat Earnings Per Share (EPS) [1] estimates with an average surprise of +17.65% and 66.5% year over-year (Y/Y) weighted average growth (WAG)[5], while 85.8% beat Sales estimates with an average surprise of +1.56% and 12.82% WAG. Importantly, 2024 and 2025 revisions have been guided upwards overall on a WAG basis. (Factset & Vettafi Data, as of June 28, 2024)

Network and Security, a core subsector of AI that we believe is even still an underappreciated long-term winner of AI, saw Darktrace (+32.09%) acquired by private equity fund Thoma Bravo for around $5 Billion USD. Meanwhile, Pure Storage (+23.50%) and Arista Networks (+20.86%) continue to climb together as enablers of AI storage and data center networking. Cybersecurity leaders Crowdstrike (+19.5%) and Palo Alto Networks (+19.3%) continue to show value in protecting the increasingly digitally automated and reliant landscape with new AI offerings. On the other hand, the market questioned Snowflake's (-16.4%) future as their revenue growth slowed slightly and their forward guidance was conservative, but we believe their technology and market positioning remain solid as AI takes off and their product release cadence, as well as end-market demand, skyrockets.

The Business Process subsector saw some pre-summer cooling off, as we saw some pressure on both business to business (B2B) and business to consumer (B2C) fronts with Salesforce (-14.6%), Samsara ( -10.8%) and Nice Ltd (-36.8%; removed from ETF at Rebalance) in the red while Fair Isaac Corporation (+19.1%) and Adobe (+10.1%) saw gains. Ultimately – we are seeing strong product updates and innovation across all these companies and maintain conviction in these companies continuing to gain share in key industries and processes across the globe. Costar (-23.5%), a leading provider of online real estate marketplaces, information and analytics, acquired Matterport, a 3D visualization technology company that has captured over 38 billion square feet of property data globally, for $1.6 billion enterprise value, further cementing Costars dominance in digital real estate technology.

Our approach continues to be monitoring the Artificial Intelligence landscape and finding underlying technologies that enable the "body of artificial intelligence" to exist and thrive in the real world. Our latest rebalance saw three additions: CyberArk, specializing in zero- trust identity management for machines, applications, and Internet of Things (IoT) - crucial in an AI-driven world of complex machine interactions; Elastic N.V., joining for its real-time search and observability capabilities, addressing the growing need for sophisticated data processing in AI systems; and Nutanix Inc., offering seamless AI application deployment across hybrid multicloud environments. These companies represent further enabling technologies that allow AI to thrive in real-world applications.

NVIDIA +36.7% / +1.01%

Nvidia continues to draw both revenue and earnings growth and optimistic long-term expectations from the markets as the premier provider of AI chips and related technologies. Demand for NVIDIA Graphic Processing Units (GPUs)x` across the globe continues to grow as data-center investment game theory story continues to play out. NVIDIA remains the most expensive on a Forward EV/Sales [4] basis of 24.8x, more than 2.5x the ETF average.

Darktrace +32.09% / +0.64%

Darktrace, a leader in zero-trust, autonomous response cybersecurity, was acquired by Thoma Bravo for $5.3 billion, which represented a 20% premium to the last closing price at around 34x adjusted EBITDA [6] for year-end 2023. Darktrace has been subsequently taken out of the THNQ ETF.

Teradyne +31.51% / +0.58%

Teradyne, which provides automated semi and wireless testing as well as industrial automation and collaborative robotic solutions through their Mobile Industrial Robots (MiR) and Universal Robot divisions, continues to see current strength in their larger testing division which is tied to the increase in high-end AI chips.

Ginkgo Bioworks -71.2% / -1.42%

Ginkgo Bioworks provides AI-driven automation for cell engineering R&D, aiming to "make biology easier to engineer." They offer platform services enabling customers to bring products to market, earning through fees and downstream value shares like milestones, royalties, or equity. Facing revenue pressures, they shifted to frontloading contracts and restructured the business, including layoffs. Despite this, Ginkgo forecasts 24% annual growth over the next three years. Now trading at second lowest Forward EV/Sales [4] in the ETF at 0.5x right behind JD.com at 0.2x

NICE Limited -36.8% / -0.53%

NICE Ltd. saw underperformance and poor earnings sentiment and was ultimately removed from the ETF due to threats to their core business and technology model. These threats include end-market consolidation and customers increasingly adopting newer generative AI technologies in-house.

Veeva Systems Inc. -21.01% / -0.42%

Veeva Systems, a cloud-computing company serving the life sciences industry, has underperformed in 2024 despite a strong Q1 2025 earnings beat. The company slightly lowered its full-year guidance to $2.71 billion from $2.74 billion, attributing the adjustment to macroeconomic challenges and foreign exchange headwinds. Veeva is transitioning off Salesforce onto their own core platform, introducing uncertainty but also potential for significant economic upside as they gain more control over their infrastructure and innovation capabilities.

HTEC ETF 2Q24 Commentary

The year 2024 began with a general expectation of greater stability and fewer unknowns. This sentiment has been reflected in a significant improvement in biotech funding, which, according to FactSet Data, rose to approximately $23 billion in Q1 2024, the fourth highest quarter on record. As supply chain, credit, and worker shortages ease, new legislation might introduce additional pressures. The impact of the BIOSECURE Act remains uncertain, but it is expected to provide a tailwind for US manufacturing by bolstering biomanufacturing capabilities and enhancing the production of critical medical supplies and technologies domestically. Changes to Medicare Advantage are putting pressure on payers, though there is no clear indication of systemic effects on healthcare yet. We anticipate accelerated recovery in the second half of the year, building towards a strong 2025.

In Q2 2024, the ROBO Global Healthcare Technology & Innovation ETF (HTEC) underperformed the VettaFi Full World Index , with a return of -3.74% compared to the benchmark's 2.87%. While Genomics and Precision Medicine showed strong performance, gains were offset by headwinds in Medical Instruments and Process Automation. This quarter, 69% of the companies in the ETF beat Earnings Per Share (EPS) [1] expectations, with a weighted average surprise of 10.45%. Valuation remains attractive, with the ETF trading at 4.26x EV/Sales [4], close to the pandemic low of 4.37x. This presents an opportunity, especially with the expected double- digit growth in Earnings Per Share (EPS)[1], sales, and EBITDA in 2025.

Genomics (+15.55%) saw the resolution of the Illumina (+5.72%) saga. Following legal challenges in both the US and Europe, Illumina's acquisition of Grail culminated in Grail being spun off and added to the ETF as a standalone company. This move allows Illumina to resume its leadership in DNA sequencing, while Grail joins the thriving liquid biopsy field. The subsegment continued its strong momentum with notable performances from Twist Bioscience (+43.57%), CareDX (+35.88%), Natera (+17.44%), and Guardant Health (+41.01%), whose Shield product remains on track to become the first FDA-approved blood test to meet Medicare coverage performance requirements. All this highlights the growing relevance of cancer diagnosis via blood tests.

Alnylam Pharmaceuticals (+49.15%) led the way in Precision Medicine after announcing the success of its Amvuttra drug in treating ATTR-CM, a serious heart disease. For context, according to FactSet Data, a Pfizer drug for the same condition is expected to generate over $4 billion in sales this year. Other highlights included United Therapeutics (+38.84%), a Q1 24’ addition to the ETF , which continued its 2024 rally after announcing the first-ever transplant of a Xenothymokidney (a genetically modified pig kidney into a living human recipient). Moderna, Vertex, Roche, Incyte, and Regeneron also saw gains above 10%, capping a strong Q2 for the subsegment.

On the downside, Process Automation (-15.54%) and Medical Instruments (-7.12%) underperformed. The market responded unfavorably to Ginkgo Bioworks' (-68.43%) business model restructuring, which focused on front-loading revenues vs their previous long terms bets approach. Eurofins (-25.64%) faced a short report alleging accounting anomalies, though the company responded stating that they maintained confidence in its accounts. Align Technology, makers of Invisalign, fell -27.7% for the quarter, despite remaining the main player in clear aligners and laying foundations for next-generation products with its acquisition of Cubicure earlier in the year.

Diagnostics (-6.33%) lagged but saw the resolution of Royal Philips' (+34.95%) class action suit over some of their CPAP, ventilators, and BiPAP machines with a $1.1 billion settlement. Exact Sciences (-36.29%) presented data showing that earlier and more personalized treatment interventions lead to better outcomes for cancer patients, supporting the idea that regular cancer screening should become part of traditional medical maintenance.

In conclusion, 2024 has shown promising signs of recovery and growth in healthcare, highlighted by significant funding increases and easing supply chain and credit issues. Despite underperformance in certain subsegments, the overall market conditions and attractive valuations indicate a potential for robust recovery and growth in the latter half of the year, setting a positive tone for a strong 2025. With upcoming legislation like the BIOSECURE Act and ongoing changes to Medicare, the landscape remains dynamic, yet filled with opportunities for innovation and advancement in healthcare technology.

Alnylam Pharmaceuticals +60.69%/+0.53%

Alnylam Pharmaceuticals, a leader in RNA interference (RNAi) therapeutics, focuses on treating various genetic, cardio-metabolic, infectious, central nervous system, and ocular diseases. They pioneered the first RNAi-based therapy, ONPATTRO, in 2018. Recently, their drug Amvuttra showed success in treating ATTR-CM, boosting their stock by nearly 50%. With four drugs on the market and a robust pipeline making them the clear market and technology leader in this space.

Guardant health +42.9% / +0.80%

Guardant Health (GH) is a leader in liquid biopsy testing, known for Guardant 360, the first FDA-approved comprehensive liquid biopsy test for late-stage cancer across 50 types. In 2021, they launched Guardant Reveal for detecting residual disease in colorectal cancer. This quarter saw their Shield blood test for colorectal cancer screening approved as a primary non-invasive option, keeping it on track to be the first FDA-approved blood test meeting Medicare coverage requirements. Guardant aims to provide comprehensive cancer testing for both liquid and tissue samples.

Twist Bioscience +42.06% / +0.55%

Twist Bioscience pioneers DNA writing for synthetic biology, using a proprietary silicon chip platform to manufacture a wide range of synthetic DNA products, including custom genes, oligonucleotides, NGS library prep tools, and antibody libraries for drug discovery. Serving thousands of customers across sectors like academia, pharma, and agriculture, Twist also engages in drug discovery with its own proprietary candidates and partners with biopharma to develop antibody therapies. This year saw them increase revenue fueled by loosening pharma budget a successful rollout of their Express Genes.

Ginkgo Bioworks -64.77% / -0.74%

Ginkgo Bioworks provides AI-driven automation for cell engineering R&D, aiming to "make biology easier to engineer." They offer platform services enabling customers to bring products to market, earning through fees and downstream value shares like milestones, royalties, or equity. Facing revenue pressures, they shifted to frontloading contracts but still missed analyst estimates by 18%. Despite this, Ginkgo forecasts 24% annual growth over the next three year.

Exact Sciences -36.29% / -0.60%

Exact Sciences pioneered colorectal cancer screening with their non-invasive Cologuard Stool DNA test, the first multi-target stool DNA test for colorectal cancer covered by Medicare and included in American Cancer Society guidelines. Despite meeting estimates, there's concern that new liquid biopsies might replace Cologuard. Despite this, the company has no long-term debt, maintained 2024 guidance with expected screening revenues of $2.16-$2.18 billion, and is developing their own liquid biopsy therapies. Cologuard remains preferred for patients avoiding clinics or blood draws.

Teladoc Health -35.43 / -0.36%

Teladoc Health, a US-based telemedicine provider, offers remote doctor consultations and virtual mental health services through BetterHelp. This quarter, revenue declined by 3.7%, following a previous miss in sales estimates. The decline is attributed to reduced ad spending and fewer paying users. However, the company added 2.2 million members since Q4, creating future cross-sell opportunities. Teladoc plans to target overseas markets to lower customer acquisition costs as well as AI powered member engagement.

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

“EV/Sales next 12 months” chart based on data from VettaFi research and FactSet Data

The“Attribution by Index Category”, 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 index (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.

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.