Feature Recommendation | WSBE 421

Invesco Aerospace & Defense ETF (PPA): Return to Normalcy will Boost these Industries

The Invesco Aerospace Defense ETF (Fund) is based on the SPADE® Defense Index (Index). The Index is a modified capitalization-weighted index that benchmarks the performance of companies involved with defense, homeland security, and space. It is composed of more than 50 firms with operations involving: naval vessels, military aircraft, missiles and munitions, battlespace awareness, C4ISR, network centric warfare, homeland security including border security and biometric and screening systems, and space systems.

PPA normally invests at least 90% of its total assets in common stocks that comprise the Index. The fund’s investments are generally in large, slow growing, but stable companies due to the long-term government contracts that they enjoy. The downside, of course, is the concentration of government business, should Congress decide to drastically reduce defense spending.

That doesn’t seem likely, even under a Democratic president. In fact, according to the Congressional Budget Office (CBO), defense spending will remain relatively flat over the next four years. This is from the CBO’s recent report:

  • In his proposed budget, the President requested a total of $706 billion for DoD in fiscal year 2021—4% less than was appropriated in 2020 after removing the effects of inflation. Of that total, $637 billion is designated for the base budget, which is intended to fund normal, peacetime activities. The remaining $69 billion is designated for emergency activities and overseas contingency operations (OCO)—that is, temporary, war-related activities, such as operations in Afghanistan and elsewhere.
  • About 70% of the OCO funding for 2021 is designated for base-budget and enduring activities (for example, regular maintenance activities that support overseas operations and are likely to continue regardless of the size of the forces deployed overseas). Designating appropriations in that way makes the request compliant with the funding caps set by the Bipartisan Budget Act of 2019 (Public Law 116-37). For 2022 through 2025, when those caps will no longer be in effect, DoD plans to request funding for those activities in the base budget.
  • According to estimates provided in the 2021 FYDP, total funding would be relatively flat through 2025, averaging about $707 billion per year in 2021 dollars.

Both PPA and the Index are rebalanced and reconstituted quarterly. PPA has been awarded four stars in Morningstar’s ratings.

The ETF’s top three holdings are:

Raytheon Technologies Corporation (RTX), headquartered in Massachusetts, provides systems and services for the commercial, military, and government customers worldwide through its Collins Aerospace Systems, Pratt & Whitney, Raytheon Intelligence & Space, and Raytheon Missiles & Defense divisions. Products include: cabin interior products, communications and aviation systems, airborne intelligence, surveillance and reconnaissance systems; aircraft engines for commercial, military, business jet, and general aviation customers; integrated sensor and communication systems for missions, training, and cyber and software solutions; and integrated air and missile defense systems; defensive and combat solutions; land- and sea-based radars; command, control, communications, and intelligence solutions; and naval and undersea sensor solutions.

The Boeing Company (BA) is Illinois-based, and through its Commercial Airplanes; Defense, Space & Security; Global Services; and Boeing Capital divisions designs and manufactures commercial jetliners, military aircraft, satellites, missile defense, human space flight and launch systems, and services worldwide.

North Carolina-based Honeywell International Inc. (HON) operates through four segments: Aerospace, Honeywell Building Technologies, Performance Materials and Technologies, and Safety and Productivity Solutions. The company offers a variety of engines, avionics, power systems, communications, navigation hardware, surveillance systems, aircraft wheels and brakes, software applications for sensors, systems and instruments, fire products, automation control, materials such as bullet-resistant armor, pharmaceutical packaging, protection equipment and apparel, among many other products and services.

Asset Allocation
As you can see by this asset allocation, the majority of the fund is invested in domestic stocks:

  • U.S. Stocks: 99.90%

Holdings Style 

Value Blend Growth
Large Cap 30 11 0
Midcap 4 28 4
Small Cap 3 12 5

Source: Morningstar.com

Top 10 Holdings

Company Symbol % of Assets
Raytheon Technologies Corp RTX 6.83%
Boeing Co BA 6.51%
Honeywell International Inc HON 6.44%
Lockheed Martin Corp LMT 6.26%
General Dynamics Corp GD 4.93%
Northrop Grumman Corp NOC 4.67%
L3Harris Technologies Inc LHX 4.42%
TransDigm Group Inc TDG 4.27%
Ball Corp BLL 3.70%
Jacobs Engineering Group Inc J 3.44%

Source: FinanceYahoo.com

Top Institutional Holders

Name Reporting Date
Total Holdings 
Position Value Outstanding
Shares Owned
Citigroup Inc. 12/31/20 405.8K $29.3M 4.07%
Morgan Stanley 12/31/20 334.4K $24.2M 3.35%
LPL Financial LLC 12/31/20 269.8K $19.5M 2.70%
Royal Bank of Canada 12/31/20 217.3K $15.7M 2.18%
Bank of America Corporation 12/31/20 196.6K $14.2M 1.97%
Searcy Financial Services, Inc. 12/31/20 139.9K $10.1M 1.40%
Wells Fargo & Company 12/31/20 106.3K $7.7M 1.06%
Raymond James Financial Services Advisors, Inc. 12/31/20 104.3K $7.5M 1.05%
Advisor Group, Inc. 12/31/20 84.0K $6.1M 0.84%
UBS Group AG 12/31/20 66.0K $4.8M 0.66%

 

Invesco Aerospace & Defense ETF (PPA)
Net Asset Value: $70.96

Performance: 

Y-T-D: 3.79%
1-year: 55.91%
3-year: 9.01%
5-year: 16.29%

Risk Rating: Average

Expense Ratio: 0.59%

Net Assets: $667.79 million

Dividend yield: 0.59%

Institutional Ownership: 29%

Website: invesco.com/us/financial-products/etfs/product-detail?audienceType=Investor&ticker=PPA

Category: Total Return

Largest Sectors:

  • Industrial
  • Technology
  • Consumer Cyclical

Largest Holdings:

  • Raytheon Technologies Corp
  • Boeing Co
  • Honeywell
Largest Institutional investors:

  • Citigroup Inc.
  • Morgan Stanley
  • LPL Financial


Technical Analysis: Invesco Aerospace & Defense ETF
by Kate Stalter

This ETF is still trading below its February 2020 high of 73.99.

Unlike tech funds, it took its time meandering higher from its March 2020 low of 39.60. It attempted a rally last June, but couldn’t maintain altitude, and sputtered lower.

As a basket of securities, an ETF won’t always show the same type of price movement you’ll see in a single stock. However, the ETF gapped up on November 3, and then again on November 9. These gaps tracked movements in the component stocks, as the market in general moved up as results of the U.S. Presidential election came into focus. It’s not that markets necessarily prefer one party over the other, but institutional investors simply welcome certainty.

The chart indicates a tradable security that’s yet to clear its 2020 structure low. It’s bobbed and weaved around its 50-day moving average for the past two months, occasionally finding support above its 10-week line, as well.

The ETF may possibly be forming a handle to an awkwardly shaped cup formation. Even if that does not play out, keep watching for an uptrend that carries the price above its March 18 high of 73.25.

The up/down volume ratio is 1.1. That means upside volume has been 10% higher over the past 50 trading sessions. That’s not bad, but ideally, you’d like to see a higher upside ratio, an indication of greater institutional buying.

In years past, institutions such as banks, insurance companies, university endowments and foundations didn’t make extensive use of ETFs, but that’s changing. Institutional investors use ETFs to complement individual stocks and to achieve broad exposure to a particular asset class.PPA-20210331

Flows for 03/01/2021 – 03/23/2021

Inflows
IEMG iShares Core MSCI Emerging Markets ETF 3,482.02
VOO Vanguard S&P 500 ETF 3,129.22
QQQ Invesco QQQ Trust 2,980.97
VTI Vanguard Total Stock Market ETF 2,864.42
VSS Vanguard FTSE All-World ex-US Small-Cap ETF 2,159.98
RSP Invesco S&P 500 Equal Weight ETF 1,900.18
VWO Vanguard FTSE Emerging Markets ETF 1,868.97
IVV iShares Core S&P 500 ETF 1,821.90
VTV Vanguard Value ETF 1,720.17
PBUS Invesco PureBeta MSCI U.S.A. ETF 1,705.38
Outflows
SPY SPDR S&P 500 ETF Trust -2,716.77
GLD SPDR Gold Trust -2,642.60
LQD iShares iBoxx USD Investment Grade Corporate Bond ETF -1,146.64
USMV iShares MSCI USA Min Vol Factor ETF -1,094.36
HYLB Xtrackers USD High Yield Corporate Bond ETF -1,054.81
TIP iShares TIPS Bond ETF -1,007.44
IYR iShares U.S. Real Estate ETF -965.52
SLV iShares Silver Trust -784.15
IAU iShares Gold Trust -653.76
GEM Goldman Sachs ActiveBeta Emerging Markets Equity ETF -637.46

Source: ETF.com

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