When Defense Is Your Only Offense

Investors have gone from pure greed to absolute panic in less than a year. 

With the Nasdaq down more than 25% and some market pundits referring this market to the dot.com bubble, expectations have dropped considerably. 

One sector that has outperformed the overall market has been aerospace and defense. 

Interest in the sector grew after Russia invaded Ukraine in February.

Searches for defense stocks by financial pros and retail skyrocketed, nearly doubling in the first week.

While some of that initial mania has died down, we’ve seen consistent interest in the defense ETFs.

In fact, the iShares U.S. Aerospace & Defense ETF ITA garners nearly double the volume of the popular Industrial Select Sector ETF XLI.

And it’s not hard to understand why many advisors prefer the ITA ETF to individual equities.

There are over 60 stocks in the sector, which some investors find overwhelming to research. 

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iShares U.S, Aerospace & Defense ETF (ITA)

ITA seeks to track the investment results of an index composed of U.S. equities in the aerospace and defense sector. 

97.59% of the fund consists of aerospace and defense stocks with 1.58% of the stocks in the fund geared towards industrial machinery and 0.61% towards leisure products. The rest is cash and derivatives. 

Since its inception sixteen years ago, ITA has delivered cumulative returns north of +400%.

In other words, $10,000 invested on May 1, 2006, would now be worth over $40,000. That’s an average annual return of 10.96% since inception. 

There are currently 35 stocks in the ITA ETF including:

Raytheon Technologies Corp (RTX); Lockheed Martin Corp (LMT); Boeing (BA); Northrop Grumman Corp (NOC); L3Harris Technologies (LHX); General Dynamics (GD); Transdigm (TDG); Textron (TXT); Howmet Aerospace (HWM); and Huntington Ingalls Industries (HII) make up the ETFs top-10 holdings. 

While the ETF is diversified, it is heavily weighted. For example, Raytheon Technologies (RTX) consists of ~22% of the portfolio, and Lockheed Martin (LMT) consists of ~17% of the portfolio. 

Moreover, nearly 55% is weighted towards the top-five holdings with the top 10 making up 75% of the total weight.

Currently, ITA pays a $0.68 annual dividend to its investors on a quarterly basis, giving it a 0.70% yield.

The fund charges investors an expense ratio of 0.42% which is reasonable given the sector specificity. And you can take comfort that ITA has total assets of $3.6 billion. 

Investing In ITA

ITA is not the most actively traded ETF. But that doesn’t mean there isn’t liquidity. On an average trading day, around 785K shares are traded. That gives it enough to offer monthly stock options as well.

It currently has an average-true-range (ATR) of $2.55 with intraday volatility is about 2.4% per day. 

Despite its positive returns it had delivered, ITA should be considered a risky ETF. In fact, its maximum drawdown is 37.03%, and its max drawdown duration lasted four months. 

ITA is down 3.02% YTD as of May 25th, significantly better than the SPY which is down 16.3%, and the QQQ which is down 26.79%.

Our Opinion – 8/10

Several of the largest corporations in the world are revising their numbers lower in anticipation of the economy slowing down. 

But even if we do sink into a recession, ITA should outperform the overall market as it has been.

We are constantly reminded of the threat of war, and given the recent invasion of Ukraine from Russia—we believe that the U.S. government will continue to take steps to strengthen its military. 

And because many of the companies in the ITA ETF derive their revenues from government contracts, we believe they’ll be just fine. 

That’s why we like the ITA ETF for the next six to twelve months.