Boeing (BA) has been in the news lately, for all the wrong reasons. After two high-profile crashes in Ethiopia and Indonesia led to a grounding of all new Boeing 737 planes and heightened scrutiny over the aircrafts' safety features, Boeing's stock has tanked 11% since mid-March.
That has led some investors to re-evaluate their holdings in the company, as well as funds that own the stock (read: "Boeing's Lesson About The Dow").
Intriguingly, the ETF with the highest percentage allocation to Boeing isn't the $70 million US Global Jets ETF (JETS), as you might think. (JETS, which tracks the global airline industry, only allocates a 2.6% weight to Boeing.)
Instead, it's the $5 billion iShares U.S. Aerospace & Defense ETF (ITA), which, according to BlackRock data, allocates 20.7% of its portfolio, or $1 billion, to Boeing.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
As such, Boeing's stock price tends to be a significant driver of ITA's returns. According to the asset correlations tool at Portfolio Visualizer, the prices of these two securities have a correlation of 0.77 over the past year, meaning that whichever direction one goes, the other tends to go 77% of the time. And over the past month, ITA has fallen 4.3%:
Source: StockCharts.com; data range 3/20/18 - 3/20/2019
Under ITA's Hood
ITA tracks the U.S. manufacturers, assemblers and distributors of airplane and defense equipment—of which Boeing is a significant player.
Other stocks in ITA's portfolio include United Technologies (UTX) and Lockheed Martin (LMT), which comprise 17.2% and 6.1% of the ETF's portfolio, respectively.
Though these weights are high, the actual market dominance of these three firms is even higher. But ITA's underlying benchmark, the Dow Jones U.S. Select Aerospace & Defense Index, caps its exposure to any one security at 22.5%. This gives ITA a size tilt toward small and midcap firms.
Despite its lackluster one-month return, ITA is still performing well over the year. Since Jan. 1, the fund is up 15.3%, compared with the SPDR S&P 500 ETF Trust (SPY), which is only up 13.5% over the same period.
ITA is the biggest defense ETF, but it isn't the cheapest. The fund costs 0.43%, which is 0.08% more than its nearest competitor, the $1.3 billion SPDR S&P Aerospace & Defense ETF (XAR).
Also, unlike the market cap-weighted ITA, XAR uses a tiered weighting scheme, splitting its portfolio into a 40/40/20 mix of large-caps, midcaps and small-caps, which are then equally weighted within the tiers. As a result, Boeing only comprises 3.4% of XAR, while United Technologies comprises 3.9% and Lockheed Martin comprises 3.8%.
The alternative weighting scheme (and cheaper cost) seems to be giving XAR a performance edge. Over the past 12 months, XAR is up 7.0%, whereas ITA has risen only 1.6%.
Year-to-date, XAR is up 16.8%.
Contact Lara Crigger at [email protected]