Is SPDR S&P Aerospace & Defense ETF (XAR) a Strong ETF Right Now?

A smart beta exchange traded fund, the SPDR S&P Aerospace & Defense ETF (XAR) debuted on 09/28/2011, and offers broad exposure to the Industrials ETFs category of the market.

What Are Smart Beta ETFs?

Market cap weighted indexes were created to reflect the market, or a specific segment of the market, and the ETF industry has traditionally been dominated by products based on this strategy.

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.

There are some investors, though, who think it's possible to beat the market with great stock selection; this group likely invests in another class of funds known as smart beta, which track non-cap weighted strategies.

Based on specific fundamental characteristics, or a combination of such, these indexes attempt to pick stocks that have a better chance of risk-return performance.

This area offers many different investment choices, such as simplest equal-weighting, fundamental weighting and volatility/momentum based weighting methodologies; however, not all of these strategies can deliver superior results.

Fund Sponsor & Index

XAR is managed by State Street Global Advisors, and this fund has amassed over $1.01 billion, which makes it one of the average sized ETFs in the Industrials ETFs. XAR, before fees and expenses, seeks to match the performance of the S&P Aerospace & Defense Select Industry Index.

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.

It's 12-month trailing dividend yield comes in at 0.90%.

Sector Exposure and Top Holdings

ETFs offer diversified exposure and thus minimize single stock risk, but it is still important to delve into a fund's holdings before investing. Most ETFs are very transparent products and many disclose their holdings on a daily basis.

XAR's heaviest allocation is in the Industrials sector, which is about 100% of the portfolio.

Looking at individual holdings, Spirit Aerosystems Holdings Inc. Class A (SPR) accounts for about 4.69% of total assets, followed by Heico Corporation (HEI) and Raytheon Technologies Corporation (RTX).

XAR's top 10 holdings account for about 43.77% of its total assets under management.

Performance and Risk

Year-to-date, the SPDR S&P Aerospace & Defense ETF has lost about -8.64% so far, and is down about -5.19% over the last 12 months (as of 01/28/2022). XAR has traded between $107.27 and $136.44 in this past 52-week period.

The ETF has a beta of 1.16 and standard deviation of 30.79% for the trailing three-year period, making it a medium risk choice in the 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 $622.14 million in assets, iShares U.S. Aerospace & Defense ETF has $2.37 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.

Bottom Line

To learn more about this product and other ETFs, screen for products that match your investment objectives and read articles on latest developments in the ETF investing universe, please visit Zacks ETF Center.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.