The outcome of Russian President Vladimir Putin’s invasion of Ukraine has yet to be decided, but it’s possible the decision has set off a path to a full-scale global war,Zelenskyy told “NBC Nightly News” anchor Lester Holt.
The war in Ukraine has already delivered a shock to global energy markets. Moreover, we are facing a deeper crisis: a shortage of food.
Commodities and hard currencies tend to make a safe heaven to the investors looking for the ways to protect their assets during the military conflict times. Those wishing to remain in stocks tend to choose defensive sectors with lower volatility. However, let’s not forget about the economy sector that directly benefits from the military conflicts and that is the aerospace and defence. Here are the 5 U.S. listed ETFs with the exposure to this sector that have been beating the S&P 500 Index since Russia began its invasion of Ukraine on 24 February 2022.
1. iShares U.S. Aerospace & Defence ETF (ITA)
The ITA is the biggest ETF in terms of the assets size of approx. $3.6bn within the aerospace and defence sector. The portfolio is very concentrated with the top 3 stocks contributing to approx. 45 percent of the total portfolio and the biggest allocation of the RAYTHEON TECHNOLOGIES CORP (RTX) contributing to approx. 22 percent of the ETF. Hence, investors should bear in mind this fund definitely holds single stock risks. The next two names with substantial allocations are LOCKHEED MARTIN CORP (LMT) and BOEING (BA) with approx. 15.5 percent and 7.5 percent respectively. Top 10 stocks account for 74 percent of the total portfolio.
The ITA vs. SPY ratio which represents the ITA’s relative performance to the SPY ETF proves the aerospace and defence sector has been outperforming the the S&P 500 Index this year.
2. SPDR S&P Aerospace & Defence ETF (XAR)
The XAR offers a well diversified portfolio with no single stock outstanding allocations. The top stock is only a 4.5 percent weighting opposite to the ITA’s 21.5 percent.
The XAR vs. SPY ratio proves the aerospace and defence sector has been outperforming the the S&P 500 Index this year which overlaps with the military tensions and war in Ukraine.
3. ARK Space Exploration & Innovation ETF (ARKX)
The major difference the ARKX ETF brings is the fund’s type which is an actively managed ETF. It comes at the cost of 75 bps which is higher opposite to the passively managed ETFs like the ITA and XAR that charge 42 bps and 35 bps respectively.
Companies within ARKX are focused on innovation across “space”. The advisor defines “Space Exploration” as leading, enabling, or benefitting from technologically enabled products and/or services that occur beyond the surface of the Earth, including:
Orbital Aerospace Companies are companies that launch, make, service, or operate platforms in orbital space, including satellites and launch vehicles.
Suborbital Aerospace Companies are companies that launch, make, service, or operate platforms in the suborbital space, but do not reach a velocity needed to remain in orbit around a planet.
Enabling Technologies Companies are companies that develop technologies used by Space Exploration related companies for successful value-add aerospace operations. These operations include artificial intelligence, robotics, 3D printing, materials, and energy storage.
Aerospace Beneficiary Companies are companies whose operations stand to benefit from aerospace activities, including agriculture, internet access, global positioning systems (GPS), construction, imaging, drones, air taxis, and electric aviation vehicles.
The top 10 holdings as of last Friday March 25th, included the following names with the largest allocation towards the KRATOS DEFENCE & SECURITY (KTOS) approaching a 9 percent weighting.
The relative performance of the ARKX vs. SPY bounced and again turned positive in February earlier this year when Russia continued accumulating troops and attacked the territory of Ukraine.
4. Direxion Daily Aerospace & Defence Bull 3x Shares (DFEN)
This leveraged ETF seeks a return that is 300 percent the return of the Dow Jones U.S. Select Aerospace & Defense Index. for a single day. The fund should not be expected to provide three times the return of the benchmark’s cumulative return for periods greater than a day. Due to the nature of the leverage related costs, this ETF is the most expensive one from the list. It charges investors with the TER of 96 bps.
The below relative performance chart shows the DFEN vs. SPY ratio has been on the up trend for the past couple of months.
5. SPDR S&P Kensho Future Security ETF (FITE)
It is true the FITE ETF is still small with the AUM of only $32m as of March 24rh but you should keep this product on your monitored list. If you are looking for a fund that is best diversified this is the product to buy. The portfolio holds 69 holdings and the top 10 stock allocations account for only 20 percent of the fund.
The SPDR S&P Kensho Future Security ETF seeks to provide investment results that correspond to the total return performance of the S&P Kensho Future Security Index. The Index is designed to capture companies whose products and services are driving innovation behind future security, which includes the areas of cyber security, advanced border security, and the following areas for military application:
- drones and drone technologies,
- space technology,
- wearable technologies and virtual or augmented reality activities.
The FITE ETF sector breakdown looks as the following:
The top 10 stock allocations of the FITE just confirm the highest level of diversification. The top stock allocation is only 2.52 percent of the total portfolio.
The relative performance chart with the FITE vs. SPY ratio continues to remain in the up trend since the beginning of February which confirms the fact that investors’ natural choice are security stocks during military conflicts.
So which ETF from this list is the best?
It all depends on your investment objectives.
- If you are looking for a big size and liquid ETF, I would go with the ITA or XAR. However, remember the ITA is very concentrated and the XAR offers better diversification.
- If you are looking for an actively managed ETF and hoping to get some extra alpha generated by the fund manager then the ARKX is a good option to go ahead.
- In case you are extremely bullish on the aerospace and defence sector and willing to take more risk then the DFEN should be your best friend.
- In case you are after the highest diversification level, you should consider the FITE, however keep in mind it is still a very small fund which might be an issue if yo are not a long-term investor.
Please note, the above article is dedicated to the ETFs listed on the U.S. exchanges. If you are interested in the European listings, please send me a direct message to discuss the best equivalent investment options on the other exchanges.