While a number of prominent economists have expressed concern over the impact that automation and robotics could have on the labor market over the coming years, it’s a trend that’s been paying off for investors this year, and which could accelerate thanks to the recently passed tax bill.
Two exchange-traded funds dedicated to this investment thesis have seen sizable gains in 2017, with growth that’s more than twice the move of the overall market. The ROBO Global Robotics & Automation Index ETF ROBO, +0.15% has gained 44.3% thus far this year, while the similarly themed Global X Robotics & Artificial Intelligence ETF BOTZ, +0.17% is up 59.4%. The S&P 500 is up nearly 20% on the year.
Both funds hold a collection of companies dedicated to the robotics and automation industries, and this is a sector that investors increasingly want exposure to. The Global X fund has seen $1.35 billion in year-to-date inflows, including $153 million over the past month, according to FactSet data. About $1.53 billion has poured into the ROBO fund this year, with $97.7 million of that coming over the past month.
Such inflows are extremely strong, especially as investors gravitate toward low-fee and broad-market funds, instead of the kind of niche exposure offered by thematic vehicles. But it comes as the sector has been one of the fastest-growing parts of the market. The average component of the Global X fund has annual sales growth of 6.59%, according to FactSet.
That growth could accelerate given the recent tax legislation out of Washington. Not only does the new law permanently cut the corporate rate to 21% from 35%, but it will repatriate the profits of U.S. companies that are held overseas.
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This will mean billions of dollars that can be spent, and according to a Bank of America Merrill Lynch survey, 35% of executives said they would use the cash for capital expenditures. That’s below the ratio of executives who said they would pay down debt (65%) or buy back stock (46%) but it still represents a sizable investment. Morgan Stanley’s Capex Plans Index hit an 11-year high in December, and its average over 2017 was its highest since 2006. “At current levels, our index suggests the upturn in equipment spending will continue into the first quarter of 2018,” the investment bank wrote on Tuesday.
“We expect equipment investment to remain robust over our forecast horizon,” it added, forecasting that investments in equipment would grow 4.8% in 2018.
Given the trends toward automation, these investments could mean heavy demand for the companies making such products.
“These aren’t luxury technologies anymore; they’re necessities for a company to stay relevant,” said Bill Studebaker, president of ROBO Global. “The trend is happening regardless, but the tax bill is the sauce on top. Things will accelerate more. We’re in the middle of a robotics arms race, and we’re on the cusp of it being ubiquitous, both in the U.S. and globally.”
The potential impact of this trend is difficult to overstate. Vanguard’s chief global economist called automation the most important trend of his lifetime. Nobel prize-winning economist Robert Shiller said it was the single-most worrisome issue about the economy’s prospects going forward.
According to a recent study by McKinsey & Co., tens of millions of jobs could be impacted worldwide in the coming years by this trend. “Our scenarios suggest that by 2030, 75 million to 375 million workers (3 to 14 percent of the global workforce) will need to switch occupational categories,” the report read. “Moreover, all workers will need to adapt, as their occupations evolve alongside increasingly capable machines.”
Studebaker said fears that robots would take jobs have been overstated, but agreed that the shift in how people work would be tremendous.
“We’ve been automating jobs for hundreds of years, and the jobs that will be lost will be structured and mundane. People need to better understand they’re a tool to improve productivity,” he said. “However, I agree that automation will be more transformative than the internet. While not every industry was changed by going online, AI and robotics will be applied to all markets, and the technologies that were science fiction just a few years ago are rapidly becoming fact.”