Invesco Aerospace & Defense ETF: A Bit Expensive But Worth A Look – Invesco Aerospace & Defense Portfolio ETF (NYSEARCA:PPA)

The Invesco Aerospace & Defense ETF (PPA) is a bit on the pricey side as far as expenses but it tracks a unique index and is worth a look for investors interested in the space. Investors have numerous options when looking aerospace and defense sector ETFs. There are three major aerospace and defense ETFs all of which follow different indices. Depending on what investors are looking for, PPA may fit the bill.

Invesco Aerospace & Defense ETF

PPA follows the SPADE™ Defense Index and the fund discloses it normally invests at least 90% of the total assets in the stocks that comprise the index. Expenses are .60%.

The index focuses on defense stocks over the aerospace industry, so the result is an index more heavily tilted toward that sub-sector than the other aerospace and defense funds. The index also uses a minimum of $100M market cap and a share price greater than $5 as criteria for inclusion. There is also a 10% cap on a stock’s weighting (at the time of rebalance). Because its broad inclusion rules focus on defense contractors over aerospace, the average market cap of the fund’s holdings is $24B, giving it the lowest average market cap and more of a mid-cap feel of the three funds we’ll look at.

We can also see by the top ten holdings that the focus of the fund is firmly on defense contractors.

(Graphic source: Invesco website)

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

ITA is the largest aerospace and defense ETF by assets ($5.2B) and has a .43% expense ratio. The fund tracks the Dow Jones U.S. Select Aerospace & Defense Index. The index is market-cap weighted with an individual holding limited to 22.5% and the aggregate of all holdings with a greater than 4.5% component weight limited to 45%. The result is a fund that has the highest average market cap weighting of the three with an average market cap of $37B.

We can also see by the holdings that the fund has much larger weights in aerospace industry than PPA, especially with the almost 20% weighting given to Boeing (BA).

(Graphic Source: iShares website)

SPDR S&P Aerospace & Defense ETF (XAR)

The third and final major aerospace and defense index fund is XAR which tracks the S&P Aerospace & Defense Select Industry Index and has an expense ratio of .35%. The index is an equal-weighted group of the aerospace and defense sub-industry portion of the S&P total market index. As a result of the equal weighting, the top ten holdings are vastly different than the other two aerospace and defense indices we examined.

(Graphic Source: SPDR website)

Summary

The aerospace and defense industry has a lot to like. Air travel has been and is projected to continue to grow, meaning the demand for commercial aircraft and components should continue to grow. In addition, many parts of the industry are heavily consolidated leading to above-average margins and returns on capital. While the defense contracting industry isn’t growing as fast, the sector is protected from economic swings since defense contractors get a majority of their revenue from the US government. Also, like the many parts of the commercial aerospace industry, the major defense contractors only face a few major competitors for large, complex contracts. Finally, many defense contracts are awarded on a cost-plus basis, meaning contractors are essentially guaranteed a certain profit margin.

The three big aerospace and defense ETFs offer investors three different ways to play the sector. You can go with a defense contractor heavy fund like PPA, an aerospace heavy fund like ITA, or an aerospace heavy equal weight fund in XAR.

Interestingly enough, the five-year annual average return for the three funds is fairly similar despite the significant differences in the indices they track.

(Source: Fund websites)

Our advice is for investors to pick the fund that best matches what they are looking to invest in and PPA is a good fund for investors looking for diversified exposure to the defense and aerospace industry with a heavy tilt toward defense.

Disclosure: I am/we are long BA, LMT, RTN, NOC, HXL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.