🛰️XAR: Defence Meets Innovation

In partnership with

Welcome back to another edition of ETF UNO, where we highlight promising ETF investment opportunities to enhance your portfolio. Today, we will focus on the SPDR S&P Aerospace & Defence ETF $XAR ( ▼ 2.35% ) . This unique investment vehicle provides exposure to companies that are at the forefront of aerospace innovation and defence technology.

In a world increasingly shaped by geopolitical tensions and technological advancements, the aerospace and defence sector plays a critical role in national security. It represents a significant frontier for investment potential. What makes the XAR ETF worthy of consideration, and how might it fit into your overall investment strategy?

Influencer code protection made simple

KeepCart: Coupon Protection partners with D2C brands like Quince, Blueland, Vessi and more to stop/monitor coupon leaks to sites/extensions like Honey, CapitalOne, RetailMeNot, and more to boost your DTC margins

Try it 14 days free - No risk, Cancel anytime

What is XAR?

The aerospace and defence industry stands at a fascinating intersection of geopolitics, technological innovation, and government spending priorities. Several key factors make this sector particularly relevant in today's investment landscape:

• 🌐Global Security Landscape: Recent years have seen a notable shift in the global security landscape. Rising geopolitical tensions, particularly in Eastern Europe and the South China Sea, have led many nations to increase their defense budgets. The ongoing Russia-Ukraine conflict and escalating Middle East tensions highlight the importance of defense capabilities, driving demand for related products and services.

• 🚀Technological Revolution: The aerospace sector is undergoing a significant transformation, moving beyond traditional defence uses. The commercial space industry is now a reality, with private companies launching satellites, advancing space tourism, and planning interplanetary missions. Innovative technologies like drones, hypersonic vehicles, and autonomous crafts are reshaping both military and civilian applications.

• 🏦Government Spending Stability: Defense spending generally shows less sensitivity to economic cycles compared to many other sectors. Military budgets, especially in the United States—responsible for about 40% of global military spending—often include multi-year procurement cycles and long-term contracts. This feature can offer investors a level of stability during times of broader market volatility.

XAR aims to match the investment results of the S&P Aerospace & Defence Select Industry Index before fees and expenses. It distinguishes itself with a modified equal-weighted indexing methodology that offers several advantages for investors:

• 📊Reduced Concentration Risk: Unlike market-cap-weighted ETFs that can become heavily concentrated in a few dominant companies, XAR spreads exposure evenly across holdings, mitigating risks from overexposure to any single firm.

• 💡Greater Exposure to Mid-Size Innovators: This equal-weight approach ensures that mid-cap aerospace and defence companies are well-represented, highlighting innovative and niche players with strong growth potential.

• 🔄Disciplined Rebalancing Mechanism: XAR requires regular rebalancing to maintain target weightings, implementing a "buy low, sell high" strategy by selling appreciated positions and increasing allocations to underperformers that still meet inclusion criteria.

Investment Strategy📝

When considering how to incorporate XAR into your broader investment strategy, several approaches merit consideration:

• 📆Sector Rotation Strategy: XAR can serve as a tactical position when aerospace and defence are expected to outperform the broader market. This approach might coincide with increased global tensions, new defence budget authorisations, or technological breakthroughs in the sector.

• 🛰️Core-Satellite Framework: Within a core-satellite portfolio structure, XAR can function effectively as a satellite position, complementing a core of broad-market index funds. This approach allows investors to maintain broad market exposure through the core while using XAR to enhance returns and express a specific view of the aerospace and defence sector.

• 🌍Thematic Overlay: For investors building a portfolio around specific economic or technological themes, XAR can represent exposure to several important trends: national security priorities, space commercialisation, autonomous systems, and advanced materials. It pairs logically with other thematic ETFs focused on cybersecurity, robotics, or specific technology subsectors.

• 📈Long-Term Strategic Allocation: Given the essential nature of defence spending and the long-term growth trajectory of commercial aerospace and space industries, some investors may choose to maintain a consistent allocation to XAR as part of a long-term strategic asset allocation, treating it as a core holding rather than a tactical position.

XAR at a glance

ETF Issuer: SPDR

Inception: 2011-09-28

Asset Class: Equity

Underlying Index: S&P Aerospace & Defence Select Industry Index

Geographical Focus: U.S.

Expense Ratio: 0.35% (as of last data point)

Dividend Yield: 0.71% (as of last data point)

Distribution Frequency: Quarterly

Historical Performance

Since its launch in September 2011, XAR has consistently outperformed the broader market and other industrial sector ETFs. The fund has shown resilience through various market cycles, including the bull market of the 2010s and the COVID-19 pandemic.

Recently, XAR has benefited from increased defence spending among NATO countries, a booming commercial space sector, and the recovery of air travel post-pandemic.

ETF Radar View

The radar chart below shows the general characteristics of the ETF:

Top 3 Reasons to Invest

1. Secular Growth Drivers Remain Intact: The fundamental drivers supporting aerospace and defence industry growth continue to strengthen. Defence modernisation initiatives across major global powers, the ongoing commercialisation of space, and the recovery and expansion of commercial air travel represent long-term growth catalysts for companies within XAR's portfolio.

2. Portfolio Diversification Benefits: Aerospace and defence stocks historically have shown different correlation patterns with the broader market compared to many other sectors. This distinct behaviour partly stems from the industry's reliance on government contracts and long-term procurement cycles rather than consumer spending or business investment.

3. Innovation Exposure with Government Backing: Unlike purely commercial technology plays, many aerospace and defence innovations benefit from significant government funding during their development phase. This public-private partnership model can reduce research and development risk while allowing companies to commercialise resulting technologies.

Top 3 Reasons Not to Invest

1. Budget Dependency and Political Risk: The defence industry's reliance on government spending makes it vulnerable to political shifts in budget priorities. Changes in administration, fiscal constraints, or evolving security priorities can impact defence procurement plans. While military spending tends to be more stable than many other budget categories, it is not immune to political winds or fiscal pressures.

2. Project Execution Challenges: Major aerospace and defence programs frequently face technical challenges, cost overruns, and schedule delays. High-profile examples, such as certain military aircraft programs or commercial airliner developments, have demonstrated how execution problems can impact company performance and, by extension, shareholder returns.

3. Ethical Considerations for Investors: Some investors are concerned about investing in companies manufacturing military equipment or weapons systems. While the aerospace and defence industry encompasses much more than weapons production, including critical infrastructure protection, commercial aviation, and space exploration, investors with specific ESG criteria may need to evaluate whether XAR aligns with their values.

🚀XAR: The Sky's Not the Limit

XAR offers a distinctive approach to a strategically important sector with multiple long-term growth catalysts. Its modified equal-weight methodology provides balanced exposure across the industry landscape, from established defence contractors to innovative aerospace companies.

As with any sector-specific investment, XAR represents a more concentrated bet than a broad market index fund and should be sized appropriately within your overall portfolio. The appropriate allocation depends on your investment time horizon, risk tolerance, and exposures.

Please consider how XAR could complement your existing investments and whether the aerospace and defence sector aligns with your financial goals and values.

As always, the ETF UNO community is here to help you navigate the ever-expanding universe of ETF options. Join our newsletter, share your thoughts on the aerospace and defence sector, and let us know which other ETFs you would like us to spotlight in future editions!

DISCLAIMER: This article is for informational purposes only and should not be considered as investment advice. Always conduct your own research and consult with a financial advisor before making investment decisions.