BOTZ: Outperforming Its Peers (NASDAQ:BOTZ)

imaginimaI dedicate a small portion of my portfolio to high risk, high growth ideas which have the potential to be the next big thing. That “thing” is very likely to relate to AI, and ETFs such as the Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ) are attractive as they provide broad exposure to the AI theme, with a focus also on Robotics. However, we do need to do our homework, as some funds promise exposure to AI but provide only a loose association or heavy concentration in semiconductor stocks. This article looks at how BOTZ is composed and whether it lives up to its name. Introducing BOTZ BOTZ was launched way back in 2016, way before the current AI craze. Its performance since then has been decent, but significantly lags benchmarks such as the Nasdaq (QQQ). Data by YChartsBOTZ remains at lower highs, with its 2021 peak. AI and robotics show a lot of promise, but AI is yet to generate significant revenues outside the semiconductors. The AUM for BOTZ is $2.74B. This is a reasonable amount, but has not really grown since 2018 which is surprising given the excitement surrounding this area. Data by YChartsLiquidity is decent with an Average Daily Dollar Volume of $18.45M. As could be expected, the dividend yield is a tiny 0.18% (TTM). The fund’s PE ratio is reported as 33 by Morningstar, but this not a reliable figure as some holdings such as Appian Corporation (APPN) are not profitable (it has a negative EPS). BOTZ has an expense ratio of 0.68%, which is average in this space and only beaten by the iShares Robotics and Artificial Intelligence Multisector ETF (IRBO). Compared to its peers, BOTZ performs well, and has an attractive expense ratio. BOTZ v peers (Seeking Alpha) BOTZ outperforms over a 3-year period as well as the 1-year period shown above. 3Y performance (Seeking Alpha) A closer look at how the portfolio is composed may explain this outperformance. Fund Composition As per the fund page, The Global X Robotics & Artificial Intelligence ETF (BOTZ) seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and artificial intelligence (AI), including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles. This definition sets it apart from the Global X Artificial Intelligence & Technology ETF (AIQ). The Robotics focus means the holdings are spread across technology and industrial sectors fairly evenly. Sector Breakdown (Seeking Alpha) BOTZ is a passively managed fund which seeks to track the Indxx Global Robotics & Artificial Intelligence Thematic Index. This is composed of between 30 and 100 holdings (it is currently 44). It is composed in an interesting way as it is not yet a simple process to classify a company as primarily involved in AI; there is no defined AI sector or GICS classification. The first step is to filter stocks on rules to filter for market capitalization, liquidity and country of listing. These parameters are easy to define but the next steps are less rigid. …the Index Provider identifies Robotics & Artificial Intelligence Companies by applying a proprietary analysis that consists of two primary components: theme identification and company analysis. As part of the theme identification process, the Index Provider analyzes industry reports, investment research and consumer data related to the robotics and artificial intelligence industry in order to establish the themes that are expected to provide the most exposure to the growth of the robotics and artificial intelligence industry. In the second step of the process, companies are analyzed based on two primary criteria: revenue exposure and primary business operations. A company is deemed to have significant exposure to the Robotics & Artificial Intelligence Themes if (i) according to a public filing, it derives a significant portion of its revenue from the Robotics & Artificial Intelligence Themes, or (ii) it has stated its primary business to be in products and services focused on the Robotics & Artificial Intelligence Themes, as determined by the Index Provider. Accordingly, the Fund’s assets will be concentrated (that is, it will hold 25% or more of its total assets) in companies that provide exposure to Robotics & Artificial Intelligence Themes. This methodology throws quite a wide net, but I am glad to see BOTZ has not simply populated its portfolio with semiconductor stocks as they are performing well. Nvidia (NVDA) is the top holding, but is the only semiconductor stock. A modified market cap-weighted methodology is used. The index is rebalanced and reconstituted on the second Friday of March. This is important as the fund holdings can change quite drastically, as a single security cannot exceed 8% following the rebalancing. This is how the holdings looked in March before the 2024 rebalancing – Top 10 in March (Global X) NVDA had grown from 8% to 21.43% due to its massive rally, and some may have bought BOTZ on the premise it was very concentrated in this one stock. However, this decreased again to 8% several weeks later after the rebalancing and is now back at 13%. This heavy weighting explains why BOTZ outperforms its peers, some of which are much more diversified and hold no NVDA. This is how the top 10 looks now – Top 10 Current (Global X) The top three stocks may be recognizable, but BOTZ has a large exposure to Japanese stocks so there will likely be some unknown companies in the list. Geographical Exposure (Global X) The top 10 holdings make up 66% of the fund and the top 15 make up 78%. The rest of the 29 stocks therefore make up only 22% and BOTZ is clearly quite concentrated. This has worked in its favor, but may not be attractive for someone looking for a much more broad exposure. The First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT), on the other hand, is very diversified across its 115 holdings and its top 10 make up only 19% of the fund. Unfortunately, this diversification has weighed, and the graphics in the last section highlights that ROBT has significantly underperformed. Risks Concentration in the top 10 stocks and only an annual rebalancing mean weightings can grow up to 21% (or higher) like NVDA did earlier this year. There is a relatively high concentration risk in specific stocks, and also in the Artificial Intelligence and Robotics theme. Holdings outside the US add geographical/currency risk. One major risk comes from AI and its applications. It is still in the very early stages of development, and it is unclear if it will be able to generate revenues for all the companies involved. Conclusions BOTZ is the best performing ETF in the area of robotics and AI, but this can be attributed to its holding in NVDA which grew to 21% before it was cut down to 8% in March’s annual rebalancing. The fund has other attractive attributes apart from performance. The portfolio composition is proprietary and selects some interesting stocks. The technology/industrials mix is appealing, as is the exposure to Japanese stocks. I rate this ETF as a speculative “buy.”

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