A smart beta exchange traded fund, the SPDR S&P Aerospace & Defense ETF (ETF:XAR) debuted on 09/28/2011, and offers 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.
Because market cap weighted indexes provide a low-cost, convenient, and transparent way of replicating market returns, they work well for investors who believe in market efficiency.
However, some investors believe in the possibility of beating the market through exceptional stock selection, and choose a different type of fund that tracks non-cap weighted strategies: smart beta.
By attempting to pick stocks that have a better chance of risk-return performance, non-cap weighted indexes are based on certain fundamental characteristics, or a combination of such.
The smart beta space gives investors many different choices, from equal-weighting, one of the simplest strategies, to more complicated ones like fundamental and volatility/momentum based weighting. However, not all of these methodologies have been able to deliver remarkable returns.
Fund Sponsor & Index
The fund is sponsored by State Street (NYSE:STT) Global Advisors. It has amassed assets over $1.32 billion, making it one of the larger 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
Cost is an important factor in selecting the right ETF, and cheaper funds can significantly outperform their more expensive cousins if all other fundamentals are the same.
Annual operating expenses for this ETF are 0.35%, making it one of the least expensive products in the space.
XAR's 12-month trailing dividend yield is 0.41%.
Sector Exposure and Top Holdings
It is important to delve into an ETF's holdings before investing despite the many upsides to these kinds of funds like diversified exposure, which minimizes single stock risk. And, most ETFs are very transparent products that disclose their holdings on a daily basis.
This ETF has heaviest allocation in the Industrials sector - about 100% of the portfolio.
Taking into account individual holdings, Boeing Company (NYSE: NYSE:BA) accounts for about 3.88% of the fund's total assets, followed by Virgin Galactic Holdings Inc (SPCE) and Huntington Ingalls Industries Inc. (NYSE: HII).
XAR's top 10 holdings account for about 36.27% of its total assets under management.
Performance and Risk
Year-to-date, the SPDR S&P Aerospace & Defense ETF has lost about -6.88% so far, and is down about -14.83% over the last 12 months (as of 08/01/2022). XAR has traded between $96.26 and $127.55 in this past 52-week period.
The ETF has a beta of 1.08 and standard deviation of 32.47% for the trailing three-year period, making it a medium risk choice in the space. With about 36 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 (NYSE: PPA) tracks SPADE Defense Index and the iShares U.S. Aerospace & Defense ETF (ETF:ITA) tracks Dow Jones U.S. Select Aerospace & Defense Index. Invesco Aerospace & Defense ETF has $1.43 billion in assets, iShares U.S. Aerospace & Defense ETF has $3.88 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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