IRBO: An Equal-Weighted Robotics And AI Fund To Capture Industry Growth (2024)

Investment Thesis

iShares Robotics and Artificial Intelligence Multisector ETF (NYSEARCA:IRBO) warrants a buy rating due to its equal-weighted holding strategy that has contributed to its favorable valuation in comparison to peer robotics funds, as well as its lower volatility. Additionally, IRBO has the lowest expense ratio and highest dividend yield compared to leading competitor funds. Finally, the robotics industry is expected to see strong growth and IRBO has the greatest diversification to capture the growth and expected returns of this industry.

Fund Overview And Compared ETFs

IRBO is an ETF that seeks to track developed and emerging markets for companies that are involved in the long-term growth of robotics and artificial intelligence. Initiated in 2018, the fund has 111 holdings and $634.44M in AUM. IRBO's top sector weights include 56.91% on information technology, 17.39% on communication, and 15.92% on industrials. IRBO is an international fund with a 53.44% weight on U.S. holdings, along with 10.62% in China and 10.08% in Japan. Importantly, IRBO's benchmark index, the NYSE FactSet Global Robotics and Artificial Intelligence Index, uses an equal-weighted strategy. I will cover more on how this impacts IRBO's prospects later.

Other ETFs examined used for comparison purposes are the Global X Robotics & Artificial Intelligence ETF (BOTZ), the First Trust Nasdaq Artificial Intelligence and Robotics ETF (ROBT), and the ARK Autonomous Technology & Robotics ETF (ARKQ). BOTZ tracks the Indxx Global Robotics & Artificial Intelligence Thematic Index. BOTZ's distinct difference from its robotics fund peers is its heavy weight on NVIDIA (NVDA) at 23.26%. However, the fund is diversified among multiple industries including industrial machinery (21.88%), semiconductors (20.43%), and medical specialties (15.27%). ROBT tracks the Nasdaq CTA Artificial Intelligence and Robotics Index. It includes holdings that are involved in artificial intelligence, robotics, and automation. Similarly to IRBO, the fund includes predominantly U.S. holdings (55.46%) but also includes holdings from Japan (14.79%), Israel (4.83%), and others. Finally, ARKQ is an actively managed fund that seeks to capture the returns of holdings in energy, automation, AI, and transportation. The fund is part of the ARK family of funds, founded by Cathie Wood.

Robotics Industry Growth

Globally, the industrial robotics market is expected to see solid growth from $48.5B in 2022 to $142.8B in 2032, representing a compound annual growth rate, or CAGR, of 11.4%. Most investors are likely already very familiar with the recent "AI boom" including technologies such as OpenAI's ChatGPT or Microsoft's Copilot, a generative AI system. The robotics industry, however, does appear to be growing at a slower rate compared to artificial intelligence. However, there are numerous applications for robotics, including manufacturing, education, and medicine. While we are not seeing the same boom in robotics yet, it appears likely that strong growth is on the horizon. Therefore, AI and robotics ETFs are likely to capture the early stages of growth in robotics while also capturing the current returns of artificial intelligence.

Performance, Expense Ratio, and Dividend Yield

IRBO has a 5-year average annual return of 12.57% with a 3-year average return of -3.39%. By comparison, ROBT has seen a lower performance with a 5-year CAGR of 8.02%. ARKQ has seen the highest 5-year annualized growth rate of 14.75%, but the lowest recent return with a 3-year CAGR of -8.8%. Finally, BOTZ has a 5-year average annual return of 11.47%. Of note, each of these funds has seen a lower 3-year and 5-year CAGR compared to the S&P 500 Index.

IRBO has the lowest expense ratio compared to others at 0.47%. Another advantage of IRBO is that it has the highest dividend yield. While still a relatively low 0.89%, IRBO has seen a 5-year dividend growth CAGR of 34.73%.

Expense Ratio, AUM, and Dividend Yield Comparison

Source: Seeking Alpha, 9 Mar 24

IRBO Holdings And Key Differences

IRBO is the most diversified fund of AI and robotics ETFs examined, with 111 holdings. As a result of the equal-weighted index that IRBO tracks, its weight on its top 10 holdings is the lowest at 14.44%. Investors can therefore expect that none of IRBO's holdings will likely reach above 3.0% weight, a key difference to ARKQ and BOTZ.

Top 10 Holdings for IRBO and Peer Competitors

Source: Multiple, compiled by author on 9 Mar 24

The holdings' strategy for IRBO presents unique advantages and disadvantages compared to other AI and robotics ETFs. The primary advantage of its equal-weighted strategy is that there is no heavy weight on any particular holding. However, this also presents a disadvantage as the fund will be unlikely to significantly capture strong returns for any outperformers. These advantages and disadvantages are discussed in further detail below.

Key Difference #1: Bubble Protection Against Superstars

Because of IRBO's equal-weighted strategy, it includes a significantly lower weight on top performers such as NVIDIA Corporation. Compared to BOTZ's 23.26% weight on NVDA, IRBO holds only 1.64%. While I personally own other funds with heavy weights on NVDA, such as VanEck Semiconductor ETF (SMH), there is a danger of overexposure to the semiconductor superstar given its 76.75% YTD price return. This has resulted in a price-to-sales ratio of over 1,100% higher than its sector median and a price-to-book ratio of over 1,500% higher than its sector median. A key downside to its equally weighted strategy is that while IRBO may see lower volatility, it may also see lower returns than its leading competitors. This has been a driving factor in IRBO's lower total 5-year performance at 44.54% compared to BOTZ's total 5-year price return of 70.38%. Such heavy weight on one holding has also resulted in BOTZ having the greatest volatility. Therefore, IRBO's lower weight on NVDA can be considered an advantage for investors looking to capture the holding at a very modest weight.

Key Difference #2: Equal Inclusion of Lesser-Known Underdogs

Besides NVDA, other robotics holdings have also seen strong returns. Two examples are MicroStrategy Incorporated (MSTR) and Arm Holdings (ARM). Due to its equal-weighted strategy, IRBO gives these underdog holdings a comparatively higher weight than its peer competitors. MSTR, an AI-driven software company, has seen a one-year price return of 512% and has grown to become IRBO's top holding at 2.04% weight. Another example is ARM, a CPU provider for semiconductor companies. Arm Holdings has seen a 74% increase in share price YTD and has driven ARM to become IRBO's #2 holding at 1.85% weight. IRBO is therefore able to capture the strong returns of these holdings and then rebalance periodically, ensuring balanced exposure to any potentially overvalued companies. Holdings such as ARM and MSTR may not receive any weight with other peer funds but are given an equal opportunity to outperform IRBO.

Valuation And Risks To Investors

IRBO has a current price of $34.53 at the time of writing this article. This price is near the top of its 52-week range of $28.23 to $35.39 and below its all-time high of $50.89 seen back in February 2021. Only BOTZ has outperformed the S&P 500 Index over the past year, likely due to its heavy weight on NVDA.

IRBO demonstrates the most attractive valuation metrics compared to peers. For example, with a P/E ratio of 27.13, IRBO has the most attractive value. Additionally, IRBO's P/B ratio of 2.98 is also the most appealing compared to peers. Given its equally weighted strategy, one can reasonably expect IRBO to maintain a P/E and P/B more attractive than its peer competitors, looking forward.

Valuation Metrics for IRBO and Peer Robotics Competitor Funds

Source: Compiled by Author from Multiple Sources, 9 Mar 24

All robotics and AI funds represent risks to investors given their tech-focused approach. However, we see the lowest volatility with IRBO compared to peer funds, likely due to its equal-weighted holdings strategy. While beta values are a measure of correlation, they also provide an implied metric for volatility. IRBO has the lowest implied volatility with a 3-year beta of 1.10 compared to the S&P 500 Index. By comparison, ROBT has a beta of 1.17, ARKQ has a 5-year beta of 1.35, and BOTZ has a beta of 1.41.

Concluding Summary

IRBO has several key advantages over other peer AI and robotics funds, driving a buy rating for the ETF. First, the fund's equal-weighted strategy has resulted in a lower weight of well-known holdings, arguably giving the fund some protection in the event of an AI bubble. Second, the fund's large diversification and equal weight capture strong returns of several lesser-known companies, such as MSTR and ARM. Finally, IRBO has the lowest expense ratio, highest dividend yield, and lowest volatility compared to peer funds. Given the AI and robotics industry's solid growth forecast, IRBO may provide an opportunity to capture strong returns while providing less volatility, lower costs, and more favorable valuation than popular competitor funds.

Robert Wilson