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Passive Investors Look to Robotics

Investors are looking to capture gains from developments in automation and artificial intelligence, according to Morningstar data

Karen Kwok 11 July, 2017 | 11:38AM

Investors are looking to capture gains from developments in automation and artificial intelligence, according to Morningstar data.

iShares Automation & Robotics ETF (RBOT) came fourth on the top 10 most popular ETF list on Morningstar.co.uk in June as passive investors explored how to profit from disruption.

Aside from tech choices, exchange-traded funds that track US and UK large-cap indices continue to feature on the most popular ETF list. Topping the list last month was the Gold Rated Vanguard S&P 500 ETF (VUSA), followed by Vanguard FTSE 100 ETF (VUKE) in third position. The Vanguard FTSE All-World Dividend Yield ETF (VHYL) and iShares FTSE 100 (ISF) came fifth and sixth on the list while Vanguard FTSE Developed Europe ex UK ETF (VERX) came ninth on the most popular list.

The Silver Rated Vanguard FTSE All-World ETF (VWRL) that provides access to the global developed and emerging equity space came second on the top 10 ETF list in June. Vanguard FTSE Emerging Markets ETF (VFEM) and iShares Physical Gold ETC (SGLN) were also on the top 10 ETF list in June.

Record Inflows into Robotics ETFs

iShares Automation & Robotics ETF saw record levels of inflows in April this year, with €227 million inflows in that month alone, data compiled by Morningstar Direct showed. This extended the ETF’s inflows in the year to €400 million inflows.

iShares Automation & Robotics ETF, which launched last year, is one of the only two robotics ETFs in Europe. This ETF has an ongoing charge at 0.4% and it has gained 12.6% year to date. The ETF seeks to track the performance of an index composed of developed and emerging market companies which are generating significant revenues from specific sectors associated with the development of automatic and robotic technology. The top five regions in the ETF are United States with 31.7% weighting in the portfolio, 24% in Japan and 18.3% in developed Asia, according to Morningstar data.

Low Charges Prove a Pull for Vanguard ETF

Morningstar passive analyst Monika Dutt said Vanguard S&P 500 ETF is one of the best in its category.

The Vanguard S&P 500 ETF offers broad and diversified exposure to US large-cap stocks by tracking the S&P 500, the most oft-cited proxy for the US equity market, said Dutt.

“Taking a passive approach to that asset class makes a lot of sense given the solid body of evidence showing that active managers struggle to consistently outperform a standard US large-cap equity market benchmark. With a low ongoing charge of 0.07%, one of the lowest among all S&P 500 index funds and ETFs--and a soundly constructed and reasonably representative benchmark, this fund is well positioned to continue its long streak of producing superior risk-adjusted returns relative its category peers,” said Dutt.

In terms of tracking performance, like most of its direct rivals, the Vanguard S&P 500 ETF has outperformed its benchmark during the past three years, mainly because of favourable withholding-tax differences between the index and the fund, said Dutt.

Vanguard FTSE All-World: One-Stop Solution

Vanguard FTSE All-World ETF is an attractive one-stop shop solution to access the global developed and emerging equity space, said Dimitar Boyadzhiev, passive analyst with Morningstar.

Vanguard FTSE All-World ETF's portfolio consists of over 3,000 companies that aim to represent 90% to 95% of the global equity universe. As such, it stands as an adequate representation of the opportunity set available to investors, said Boyadzhiev.

“At 0.25%, the fund is the cheapest global-equity ETF that holds stocks from developed and emerging markets. This is testament to Vanguard's commitment to indexing and its mutual structure; Vanguard is run for investors, with profits often passed on as lower fees,” said Boyadzhiev.

He added that the fund has delivered above-average risk-adjusted performance during the trailing three-year period when compared with peers in the category, which include actively managed funds. Meanwhile, the FTSE All-World Index has outperformed by a large margin the average fund in the category over the last five and 10 years.

Vanguard FTSE 100 ETF Will Likely Lag Peers

Vanguard FTSE 100 ETF receives a Neutral Rating by Morningstar analysts. The ETF is a strong choice for investors seeking exposure to UK mega-caps, but its lack of breadth means it will likely lag category peers over the long term, said Hortense Bioy, director of European passive strategies at Morningstar.

“The FTSE 100 may be a widely followed benchmark, often cited as a proxy for the UK stock market, but it is not a compelling long-term investment proposition.  The index is concentrated in giant caps and leaves investors underexposed to other segments of the UK market. The UK large-cap Morningstar Category includes better-diversified passive and active offerings. For example, we have a more favourable view of the funds that track the broader FTSE All-Share,” said Bioy.

Many active managers in the category also have demonstrated they can add value over long stretches of time by veering away from their large-cap mandate and tapping into mid-caps and small caps when the market environment is favourable to the latter. Therefore, Bioy said it comes as no surprise that the Vanguard FTSE 100 ETF has lagged the average fund in the category since its 2012 inception.

However, if one is looking for passive exposure to the pure large-cap segment of the UK market, the Vanguard FTSE 100 ETF is hard to fault, said Bioy. It charges a competitive fee of 0.09%, boasts a minimal level of tracking error, and exhibits some of the tightest spreads on the London Stock Exchange, Bioy added. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk