Why Robot ETFs Are Poised to Outperform for the Next 5 Years

Artificial intelligence (AI) has been the defining trend for the stock market. Some AI stocks have rocketed tenfold within five years, and AI exchange-traded funds (ETFs) have been some of the market's top-performing funds.

However, the next big winners may be robot stocks and ETFs. These funds also ride AI tailwinds but focus on physical AI. Humanoid robots, drones, and AI-powered surgical tools are some of the examples of physical AI in action. This pivot takes some of the leaders of the current AI boom while scanning for future opportunities.

Here are some of the reasons why robot ETFs are bound to outperform.

The AI boom is still early

Image source: Getty Images.

Even though AI ETFs have been the center of attention for a few years, the technology is still in its early stages. AI and its real-world applications continue to advance, and right now, AI's capabilities are the worst that they will ever be.

McDonald's opened an automated restaurant a few years ago but didn't scale the concept because the tech wasn't advanced enough. This investment demonstrates a strong demand from McDonald's and other fast food restaurants to use AI to fill in labor shortage gaps and expand margins.

AI models like ChatGPT and Gemini also continue to push the envelope of what is possible. While these AI software tools may seem inconsequential for robots, these same tools act as a robot's brain. For instance, Tesla's Optimus humanoid robots pull information from Grok to function.

We don't yet have physical AI showing up in many industries at a large scale. That's why investors are still early in the AI boom despite all of the attention that has gravitated toward the industry.

The physical AI market is set to surge

Physical AI may be one of the most revolutionary technologies we have encountered to date. Nvidia CEO Jensen Huang believes AI will fuel the fourth industrial revolution and normalize four-day work weeks. It's these types of statements that demonstrate how life-changing robots can become.

It's not just Huang who's bullish on this industry. SNS Insider projects the physical AI market will achieve a 32.5% compound annual growth rate from now until 2033. That high growth rate can generate enough momentum for robot ETFs to outperform the S&P 500 in the long run.

Effective robots can boost productivity and expand margins, and that would benefit every industry. Big tech, retail leaders, and other companies are already investing in robots. As they become more advanced, the dollars will continue to flow into this field.

Familiar winners show up in robot ETFs

Robot ETFs can captivate investors due to their long-term potential, but it's just as important to assess what is happening right now. The Global X Robotics & Artificial Intelligence ETF (NASDAQ: BOTZ) has produced an annualized 19.4% return over the past three years. Nvidia happens to be its largest position since companies need AI chips to power their robots.

The Global X Artificial Intelligence & Technology ETF (NASDAQ: AIQ) is another potential long-term winner that has an annualized 34% return over the past three years. Alphabet is the fund's top position, and it also contains a bunch of AI chip stocks in its 10 largest holdings.

Since robots and artificial intelligence are intertwined, it makes sense that robot ETFs contain some of the biggest winners of the AI boom. Those winners should continue to extend their rallies as physical AI's market share grows.

Robot ETFs will also put themselves in a position to capitalize on robot producers instead of just relying on AI chipmakers. For instance, Symbotic is a common holding in AI and robot ETFs, and that stock has more than doubled year to date. The company produces warehouse robots that Walmart and other big retailers use.

You don't have to guess which individual robotics stock will outperform the S&P 500. Robot ETFs offer exposure to the entire sector, making it easier for investors to ride the upside.

Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Nvidia, Symbotic, Tesla, and Walmart. The Motley Fool has a disclosure policy.