ETF Of The Week: Boeing’s Woes Weigh On ‘ITA’

Boeing's rocky March has roiled the biggest aerospace and defense ETF. 

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%:

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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.

XAR Outperforms

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]