Invesco Aerospace & Defense ETF: Changing World Order (NYSEARCA:PPA)

Overview

Invesco Aerospace and Defense ETF (NYSEARCA:PPA) (the “Fund”) provides exposure to a broad range of established companies involved in the development and manufacturing of the U.S. defense and aerospace businesses.

The fund is invested in 56 shares. At least 90% of the total assets of the common stocks that make up the SPADE™ Defense Index.

The Fund’s total expense ratio is 0.58% per annum (4th the cheapest of Similar ETFs). SPDR and iShares offer similar his ETFs with lower expense ratios in the aerospace and defense sector.

performance

The fund was able to track the index relatively closely, but was unable to outperform the SPADE Defense Index.

The Fund’s NAV has grown approximately 10.17% p.a.

portfolio

The fund offers exposure to an interesting segment of the industrial industry, the aerospace and defense sector.

Companies in this sector tend to be fairly large and slow growing, but are very stable as long-term government contracts are widely used for most services.

The fund’s largest holding is Lockheed Martin (LMT), the world’s largest defense contractor by revenue. Consistently #1 on the list of Top 100 U.S. Federal Government Contractors.

The U.S. Department of Defense 12.4% The share of the US federal budget in 2021 equates to $1.51 trillion in available funds (approximately $4,600 per capita in the US).

Lockheed Martin Corp. is the prime contractor for the U.S. Government, 10.3% of total funds available.

Boeing (BA) and Raytheon Technologies (RTX) are also beneficiaries of government spending, each getting more than 5% of the available funding.

All three are part of the fund’s top five holdings, shown below.

Government military spending from 1949 to 2020

NATO member countries are major customers of PPA fund holdings. The United States, along with Europe and Canada, has the highest military spending among her NATO members.

US defense spending in 2021 is estimated at about $726 billion, with Europe and Canada combined at about $323 billion.

Although defense spending by NATO member states has increased gradually since 2017, many NATO member states still fall below the NATO guideline of 2% of their defense spending.

NATO targets 2% defense spending as a percentage of GDP, but many large powers such as Germany and Canada do not meet the 2% guideline. Please refer to the following.

There is plenty of room for additional defense spending by NATO member states, which is beneficial to the Fund.

Military spending by NATO member countries is increasing year by year. cyclical method From 1949 to 2020, the United States was the main driver. See graph below.

multiple catalysts

There are multiple catalysts for increased military spending by NATO member states. The first trigger is the war between Russia and Ukraine.

The danger of war, I believe, has been forgotten and ignored by many European governments. Now that Putin has brought war to Europe again, there is growing political will to increase military spending in NATO countries.

The second catalyst is China. Since the end of the Cold War, the United States has enjoyed the status of the world’s sole superpower.

There is now a changing world order in which China is poised to exert greater influence on the world stage and become a superpower in its own right.

NATO members must continue to outpace China in military spending to contain China’s influence and diplomatic power.

The final catalyst I want to talk about is climate change. Due to climate change, countries in the Middle East and Africa are experiencing extreme drought.

farmland is Turning Desertification and heat waves are killing crops and grazing animals. A lack of economic stability has made the region prone to conflict and millions of people have fled to Europe.

Uncontrolled mass migration is a serious risk for Europe as it could destabilize the region politically and economically.

European governments need to increase military spending to control immigration and secure borders.

Conclusion

the fund invests in It is a large company, slow growing, but very stable due to the widespread use of long-term government contracts for military spending.

There are multiple long-term factors driving increased military spending by NATO countries, suggesting further upside for the Invesco Aerospace & Defense ETF.

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