After an investor decides to gain targeted exposure to the defense industry, the usual next step is to decide which vehicle or strategy makes the most sense for fostering defense access. Many opt to use the ETF wrapper to accomplish this. Compared to mutual fund alternatives, ETFs can offer greater tax efficiency, intraday liquidity, and more. Of course, choosing the right ETF to gain defense exposure is critical. After all, the defense industry is varied, containing a wide mix of different companies and sectors within its umbrella.
Key Takeaways:
- There are many compelling ETFs to choose from to gain access to the defense industry. Each one offers its own take on portfolio construction.
- Many traditional defense ETFs can be very top-heavy, largely leaning into a few strong defense stocks.
- The Invesco Aerospace & Defense ETF (PPA ) looks to circumvent this through its index, which uses a modified cap-weighted methodology to cap the weight of individual stocks.
Understanding the portfolio constituents of a fund is crucial. Every defense ETF — and its respective index, should it employ one — may go about fostering defense exposure in a different way.
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For instance, there are some defense ETFs that lean heavily into a specific few names. This sort of approach can work well if the top-heavy defense companies do well. But if these stocks falter, the fund could be adversely affected.
PPA's Broader Take on Defense Exposure
Moments like this are why a fund that employs a bit of a more balanced approach can offer a strong use case. Take the Invesco Aerospace & Defense ETF (PPA ), as an example.
PPA uses the SPADE Defense Index to help gain exposure to the defense industry. The index employs a modified cap-weighted methodology in its portfolio construction process. Crucially, no singular stock can comprise more than 10% of the index’s portfolio weight.
See More: More Signs This Defense ETF Can Take Off
This allows the SPADE Defense Index and PPA to offer their own compelling take on defense exposure. The index’s cap-weighting methodology allows it to lean into crucial companies within defense and homeland security without being beholden to them for portfolio performance.
For those looking to amplify their exposure to the defense industry, this type of investment approach can make a lot of sense. Diversified defense investments that allocate to a wider mix of companies can help investors tackle opportunities in the defense sector without over-exposing them to particular names.
For more news, information, and analysis, visit the Investing in Defense Content Hub.
Invesco Distributors, Inc. is an independent company unaffiliated with VettaFi LLC (“VettaFi”). These articles do not form any kind of legal partnership, agency affiliation, or similar relationship between VettaFi and Invesco Distributors, Inc., nor is such a relationship created or implied by the articles herein. VettaFi LLC is the author and owner of these articles.
