IIndustrial and technological evolution is often driven by automation. History shows that this trend can benefit investors because as a company’s efficiency increases, margins improve.
It’s something to consider at a time when automation is increasingly part of the business productivity lexicon. Investors can tap into that theme through multiple exchange-traded funds, including the ARK Autonomous Technology & Robotics ETF (CBOE: ARKQ).
As Sam Korus, associate portfolio manager at ARK Investment Management points out, agriculture and manufacturing have documented stories of significant increases in margins as automation takes hold. As this trend occurs across multiple industries, the potential is nearly limitless for investors.
“ARK research suggests that in the absence of sales growth, increased automation could double the operating margins and enterprise value (EV) of equity markets by 2025,” notes Korus. “Compared to the approximately 25 years it takes to achieve current levels of automation in manufacturing, automation economically could reach similar levels within the next five years due to the convergence of technologies and the growing rate of innovation.”
The $ 1.62 billion ARKQ is one of the most ideal games to increase automation because it is one of the few ETFs with an emphasis on autonomous transportation, automation and robotics companies.
ARKQ’s 9.74% weighting on Tesla (NASDAQ: TSLA), one of the largest allocations of its kind among all ETFs, gives the fund credibility on the autonomous transportation front. But investors shouldn’t sleep on other ARKQ components with extensive automation exposure, including agricultural equipment manufacturer Deere (NYSE: DE). The depth of ARKQ may prove relevant as automation takes shape over the long haul.
“How much higher could automation push operating margins? Compensation for manufacturing labor as a share of revenue decreased by approximately 15 percentage points as robot density increased from 20 to 176, as shown below. If the same relationship were to apply broadly, labor compensation as a share of GDP or national income could similarly decline over the next five years, ”adds Korus.
Automation will not affect all sectors and industries equally, but the concept is likely to have an impact on communications services, consumer discretionary, industrial and technology sectors. In terms of disruptive industries, some of which ARKQ is on display, where automation looms, think 3D printing and transportation, among others.
“Additionally, history suggests that some industries and companies will automate quickly, increasing productivity, profitability and sales, while others will lag behind. The impact of automation on the wider economy could be catalysed. Indeed, a handful of innovative companies could adopt automation early and aggressively, operating far more profitably than others and catalyzing adoption across the economy, ”Korus concludes.
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