Robotics Destroying the Middle Class? ETFs to Consider

Is automation, not immigration, the true enemy of the American middle class?

By Hafeez Esmail, Main Management

The 2016 election was among the more contentious political contests in recent memory. A key flashpoint was the impact of illegal immigration and its impact on the American worker, as touted by the Trump campaign.  However, with less than 1% annual growth in the US population (with about half of that from US births and half from legal immigration) should population influx really be where attention needs to be focused?

NPR has an excellent graphic titled “Map: The Most Common Job In Every State” derived from Census Bureau data.  It tracks the most common job in each state between 1978 and 2014.  In 1978 the most common job in most US states was “Secretary”.  Fast forward to 2014 and the most common job in most US states was “Truck, delivery and tractor drivers”.  Both jobs may be thought of as the primary middle class occupation of their day.

Otto is a San Francisco based self-driving truck company that Uber purchased in August 2016 for $680 million.  On October 19^th 2016 an autonomous truck operated by Otto delivered 51,744 cans of Budweiser beer from Fort Collins to Colorado Springs, a distance of 120 miles, with no driver at the wheel, though one was in the cab.  This can only be an ominous sign for America’s most common middle class job.

Following this accomplishment, Daniel Murray, vice president of research at the American Transportation Research Institute stated, “I moved my personal time line from 15-to-20 years up to five,” in terms of his expectation for how soon self-driving trucks will be in commercial use.  Although a ‘truck driver’ may need to be in the cab, it’s highly likely that the wages paid for this job will plummet, given that they will effectively be reduced to the role of ‘truck monitor’.

While the impact of automation appears poised to grow exponentially, it may have already made an indelible impact.  Bloomberg’s recent “More Robots, Fewer Jobs” article draws upon a March 2017 study by economists Daron Acemoglu of MIT and Pascual Restrepo of Boston University detailing the significant impact of robotics on workers.  Per the map below, between 1990 and 2007, upper portions of the rust belt, particularly Michigan and Ohio, saw sizable growth in robots per thousand workers.

The auto industry uses more robots than any other, which help to explain the distribution on the map, but so do the plastic, chemical and pharmaceutical companies.  While there are a host of factors that weigh on manufacturing employment, including overseas competition and value of the greenback, Acemoglu and Restrepo ultimately concluded that adding robots to a given area reduces wages and lowers employment.

The predictions of the impact of automation on jobs get more dire.  In a December 2016 opinion letter in the Guardian newspaper, world-renowned physicist Stephen Hawking stated “the automation of factories has already decimated jobs in traditional manufacturing, and the rise of artificial intelligence is likely to extend this job destruction deep into the middle classes, with only the most caring, creative or supervisory roles remaining.”  The Bloomberg chart below echoes a similar sentiment –

A report from February 2016 authored by Citibank in conjunction with the University of Oxford predicted that 47% of US jobs are at risk of automation within the next 10-20 years.  It’s not limited to the US as the same study predicted 35% of UK jobs are at risk, while in China it’s a massive 77% of their population.  Across the OECD, the average number of jobs predicted to be at risk is 57%.  If this were to occur it likely means significant social dislocations, many of which seem difficult to fathom.

Clearly the impacts of technology, at a quicker pace than many may imagine, may dramatically change the employment landscape.  From a sector level, XLK (Technology Select Sector SPDR Fund) may be an ETF that broadly captures this trend.  On a more granular basis IGV (iShares North American Tech-Software ETF) may be worth a closer look, as it limits individual security weightings to 8.5% and thus provides diverse exposure to growth oriented software firms, including mid-cap names.  For those looking to specifically hone in on robotics, although it currently has lower trading volumes, BOTZ (Robotics & Artificial Intelligence ETF) may warrant consideration.

Hafeez Esmail is the Chief Compliance Officer at Main Management, a participant in the ETF Strategist Channel.

A pioneer in managing all-ETF portfolios, Main Management LLC is committed to delivering liquid, transparent and cost-effective investment solutions. By combining asset allocation insights with smart implementation vehicles, Main Management offers a unique approach that translates into distinct advantages for our clients, including diversification, cost efficiency, tax awareness and transparency. For more information, visit http://www.mainmgt.com.