The SPDR S&P Aerospace & Defense ETF (XAR) was launched on 09/28/2011, and is a smart beta exchange traded fund designed to offer broad exposure to the Industrials ETFs category of the market.
What Are Smart Beta ETFs?
The ETF industry has long been dominated by products based on market cap weighted indexes, a strategy created to reflect the market or a particular market segment.
A good option for investors who believe in market efficiency, market cap weighted indexes offer a low-cost, convenient, and transparent way of replicating market returns.
On the other hand, some investors who believe that it is possible to beat the market by superior stock selection opt to invest in another class of funds that track non-cap weighted strategies--popularly known as smart beta.
Non-cap weighted indexes try to choose stocks that have a better chance of risk-return performance, which is based on specific fundamental characteristics, or a mix of other such characteristics.
While this space offers a number of choices to investors, including simplest equal-weighting, fundamental weighting and volatility/momentum based weighting methodologies, not all these strategies have been able to deliver superior results.
Fund Sponsor & Index
The fund is managed by State Street Global Advisors. XAR has been able to amass assets over $1.20 billion, making it one of the average sized ETFs in the Industrials ETFs. XAR seeks to match the performance of the S&P Aerospace & Defense Select Industry Index before fees and expenses.
The S&P Aerospace & Defense Select Industry Index represents the aerospace & defense sub-industry portion of the S&P Total Stock Market Index. The S&P TMI tracks all the U.S. common stocks listed on the NYSE, AMEX, NASDAQ National Market and NASDAQ Global Select Market. The Aerospace & Defense Index is a modified equal weight index.
Cost & Other Expenses
Expense ratios are an important factor in the return of an ETF and in the long-term, cheaper funds can significantly outperform their more expensive cousins, other things remaining the same.
Operating expenses on an annual basis are 0.35% for XAR, making it one of the least expensive products in the space. The fund has a 12-month trailing dividend yield of 0.78%.
Sector Exposure and Top Holdings
While ETFs offer diversified exposure, which minimizes single stock risk, a deep look into a fund's holdings is a valuable exercise. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
For XAR, it has heaviest allocation in the Industrials sector --about 100% of the portfolio.
Taking into account individual holdings, Spirit Aerosystems Holdings Inc. Class A (SPR) accounts for about 4.69% of the fund's total assets, followed by Heico Corporation (HEI) and Raytheon Technologies Corporation (RTX).
Its top 10 holdings account for approximately 43.77% of XAR's total assets under management.
Performance and Risk
The ETF has added about 12.09% so far this year and is up about 25.12% in the last one year (as of 11/12/2021). In the past 52-week period, it has traded between $101.37 and $136.44.
The fund has a beta of 1.17 and standard deviation of 31% for the trailing three-year period, which makes XAR a medium risk choice in this particular space. With about 34 holdings, it has more concentrated exposure than peers.
Alternatives
SPDR S&P Aerospace & Defense ETF is a reasonable option for investors seeking to outperform the Industrials ETFs segment of the market. However, there are other ETFs in the space which investors could consider.
Invesco Aerospace & Defense ETF (PPA) tracks SPADE Defense Index and the iShares U.S. Aerospace & Defense ETF (ITA) tracks Dow Jones U.S. Select Aerospace & Defense Index. Invesco Aerospace & Defense ETF has $683.47 million in assets, iShares U.S. Aerospace & Defense ETF has $2.61 billion. PPA has an expense ratio of 0.61% and ITA charges 0.42%.
Investors looking for cheaper and lower-risk options should consider traditional market cap weighted ETFs that aim to match the returns of the Industrials ETFs.
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Article initially appeared on nasdaq.com
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