BOTZ And UBOT: Opportunistic Investment In AI Trend

Investment Thesis

The Global X Robotics and Artificial Intelligence Index has been in a steady uptrend since the market low of October 2022. The rally has accelerated since Nvidia (NVDA), the leader in computing processors for AI, reported exceptional results. The market reaction to Nvidia results can be characterized as “AI euphoria”. It has led to a substantial increase in ratings for all companies involved in AI.

(NASDAQ:BOTZ) is the non-leveraged exchange-traded fund (“ETF”) of the Global X Robotics and Artificial Intelligence Index and (NYSEARCA:UBOT) is the 2X leveraged counterpart. I rate BOTZ and UBOT a Buy.

Analysis

Since UBOT is a 2X leveraged fund that replicates the daily returns of the Robotics and Artificial Intelligence Index, and it holds only BOTZ as its equity component, its performance is strongly correlated with BOTZ. Therefore, its analysis in mainly achieved by analyzing the stock holdings of BOTZ.

BOTZ, currently, holds 47 stocks specialized in robotics and artificial intelligence. The top 10 holdings constitute 65% of the total weight. More than half of its weight is in US stocks, and about a third are from Japan. The top 2 holdings are Nvidia and Intuitive Surgical (ISRG). By sectors, most holdings are in technology (48%), industrials (34%) and health care (15%).

The top 10 stocks in BOTZ are all in an uptrend since October 2022. They gained between 31% of Omron to an amazing 266% of NVIDIA. See the next two charts.

The top 10 stocks are in a list sorted by their weight in BOTZ. Of the ten stocks, four are from US, five from Japan, and one from Switzerland.

Both the US and the Japanese stock markets have been in a strong uptrend since October 2022.

Despite the negative press and the concerns about the health of the credit conditions, the market has been very resilient for the last six months. The AMI market risk indicators has been risk-on since October 2022. This is the main argument in favor of a continuation of the market recovery.

BOTZ vs. Leveraged ETF UBOT

To illustrate the relationship between BOTZ and its leveraged counterpart, following are their 2-year weekly charts.

The first chart below shows that BOTZ established an inverse head-and-shoulders pattern with a bottom in October 2022. The uptrend started at that time is still intact. Currently, BOTZ is in a correction, but it is still well above the 50-day SMA. This correction may prove to be a good opportunity to initiate a long position.

The next chart shows that although UBOT is in a similar uptrend and well above its 50-day SMA, it still below the 200-day SMA. The most likely scenario is to have BOTZ test the 200-day SMA as support, while UBOT would cross above its 200-day SMA.

The next chart shows the total return of BOTZ and UBOT since the COVID crash of March 2020.

Clearly, BOTZ and UBOT display long and stable trends. In fact, the three-year time interval can be divided in three trends: 1st uptrend from March 2020 to November 2021, a downtrend from November 2021 to October 2022, and a second uptrend since October 2022. In the following table, we see the total returns of a long position in both funds for each period.

Click to enlarge

The two periods in uptrends have been very profitable for long positions in UBOT. Over the 20 months from March 2020 to November 2021, UBOT returned about 5 times more than BOTZ. That is a big deviation from the 2 times daily returns.

The current period, starting since October 2022, has also seen exceptionally high gains. Those gains were made during a time when the equity market as a whole has been struggling. It is expected that AI and Robotics to continue making high gains after the broad market turns bullish.

Conclusion

BOTZ is definitely a BUY for the following reasons:

1. Most stocks in its composition are in an uptrend
2. Both US and Japan markets are rising
3. Seeking Alpha Quant has a high BUY rating of BOTZ (4.37/5).

BOTZ is suitable as a long term investment vehicle.

UBOT is a BUY because its non-leveraged counterpart is in an uptrend. Being a leveraged fund, UBOT is not suitable for long-term investing, however.

Risk Warning

UBOT, as a leveraged fund, may suffer value erosion and should only be used as a tactical, short-term investment vehicle.

Here is a detailed message from the SEC on the risks inherent in leveraged ETFs.