XAR - PPA: A Continued Beneficiary Of Geopolitical Risk
2023-11-06 04:32:17 ET
Summary
- Invesco Aerospace & Defense ETF is worth considering for long-term allocation due to the secular uptrend in geopolitical risks and the likelihood of increased defense spending.
- PPA tracks the SPADE Defense Index and has been outperforming the S&P 500, with improving relative momentum and potential for continued outperformance.
- PPA holds top holdings such as Northrop Grumman, RTX, Lockheed Martin, Boeing, and General Electric, and compares well to similar ETFs in the market.
Credit event or not, I think we can all agree that geopolitical risks continue to be in a secular uptrend. Because of that, the Invesco Aerospace & Defense ETF ( PPA ), which seeks exposure to the aerospace and defense sectors, is probably worth a long-term allocation. No matter what happens to the economy, defense spending is likely to only increase, benefiting stocks in the space.
ETF Overview
PPA is a fund that tracks the performance of the SPADE Defense Index. The fund's objective is to mirror the performance of the index, which comprises companies involved in the development, manufacturing, operations, and support of U.S. defense, homeland security, and aerospace operations. The fund and the index are rebalanced and reconstituted quarterly.
PPA had been outperforming the S&P 500 for a number of years on a relative basis until Covid hit. It then meaningfully underperformed before starting to come back strong entering 2022. Relative momentum is clearly improving and looks set to continue. Yes, it lagged this year, but much of that is because of AI mania.
From a fundamental perspective, the Price/Earnings ratio is admittedly rich at 23.87, but with a Return on Equity of 17.71% and an increased likelihood of further government spending independent of who is in the White House, I don't know if any of that matters.
Top ETF Holdings
PPA holds a diverse portfolio of stocks, with the top ten holdings accounting for just over half of the total assets under management. The top five individual holdings in PPA's portfolio include:
- Northrop Grumman (NOC)
- RTX (RTX)
- Lockheed Martin (LMT)
- Boeing (BA)
- General Electric (GE)
These companies are industry giants, primarily engaged in the research, development, manufacture, operation, and support of defense, military, homeland security, and space operations. RTX and Lockheed Martin are the largest allocations at 7.02% and 6.76%, respectively.
Peer Comparison
When compared to similar ETFs in the market, such as the SPDR S&P Aerospace & Defense ETF ( XAR ) and the iShares U.S. Aerospace & Defense ETF ( ITA ), PPA holds its ground well. It's outperformed each over the last three years, given the strength and weighting of its top holdings.
The portfolio composition matters in explaining the performance differential. ITA, although having a larger asset base and a lower expense ratio, has a substantial weighting on Boeing, which is still trying to recover from recent setbacks. So long as RTX and Lockheed in particular perform better than most, PPA continues to likely shine against its peers.
Market Momentum
As noted, PPA's relative momentum has been improving, with the geopolitical backdrop likely propelling it to continue outperforming the broader S&P 500. The fund's solid performance, coupled with its comprehensive exposure to the aerospace and defense sectors, makes it an attractive investment option for those seeking to capitalize on these industries' potential growth.
The bottom line is simple. The Invesco Aerospace & Defense ETF offers an effective way for investors to gain diversified exposure to the aerospace and defense sectors, which likely continue to become focus points in the months ahead given ongoing geopolitical risks and the threat of larger wars. Its consistent performance, robust growth rates, and government backing make it an attractive choice for long-term investors.
For further details see:
PPA: A Continued Beneficiary Of Geopolitical Risk