The Invesco Aerospace & Defense ETF (NYSEARCA:PPA) has outperformed its peers over the past three, five, and 10 years. Defense stocks have historically been a good place to invest, and I’m bullish on PPA as a good way to gain exposure to them, thanks to its outperformance versus peers, its diversified approach to investing in aerospace and defense, and the fact that it gives investors a bit of different exposure to the space versus its peers.
What Is the PPA ETF’s Strategy?
According to fund sponsor Invesco (NYSE:IVZ), PPA is “based on the SPADE Defense Index. The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to identify a group of companies involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations. The Fund and the Index are rebalanced and reconstituted quarterly.”
The fund launched in 2005 and has $2.9 billion in assets under management (AUM).
Why Invest in Defense Stocks?
Defense stocks are generally a good sector for investors to gain exposure to, as defense companies have strong relationships with large and stable customers, like the U.S. government and other national governments. Because of these strong, longstanding relationships and the considerable technical expertise and financial resources required to manufacture products like fighter jets, missiles, drones, and other complex military-grade equipment, these companies enjoy strong moats around their businesses.
Furthermore, defense spending is often uncorrelated with the broader economy, giving investors some downside protection.
A Diversified Aerospace and Defense Portfolio
PPA offers investors solid diversification within the aerospace and defense sector. It holds 53 stocks, and its top 10 holdings make up 50.7% of assets.
This makes PPA wider-reaching than peers like the SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR) and the iShares U.S. Aerospace & Defense ETF (BATS:ITA), which own 34 and 38 stocks, respectively.
Below, you’ll find an overview of PPA’s top 10 holdings using TipRanks’ holdings tool.
PPA owns all of the typical defense industry stalwarts that you would expect it to, like Lockheed Martin (NYSE:LMT), RTX Corporation (NYSE:RTX), and Northrop Grumman (NYSE:NOC).
But what differentiates it a bit is that it also owns stocks that you might not immediately think of as aerospace and defense stocks, like General Electric (NYSE:GE) and Honeywell (NASDAQ:HON). While these stocks are indeed involved in aerospace and defense, they are giant industrial conglomerates with irons in the fires of many other industries as well. And while these stocks play a prominent role in PPA’s SPADE Defense Index, they are absent from the underlying indices of XAR and ITA.
As you can see, General Electric is PPA’s largest holding, with a weighting of 7.5%. And this far-reaching approach to aerospace and defense has been a good thing for the fund, as shares of General Electric have quietly gained 87.5% over the past year, driving a strong performance for PPA, as we’ll discuss further below. Honeywell’s performance hasn’t been quite as spectacular as General Electric’s, but it has still gained a decent 9.5% over the past year.
Palantir (NYSE:PLTR) is another interesting example of a stock that PPA owns, but XAR and ITA do not. While certainly not a traditional defense company, Palantir’s software and data solutions are utilized by the U.S. military, the Department of Defense, and other defense agencies around the world.
I like the fact that PPA gives investors exposure to the next generation of defense stocks like this. To be clear, Palantir isn’t a top holding, as it is just a small position within the fund, but Palantir has a lot of potential, and shares have gained 198.1% over the past year.
Another thing that I really like about PPA is that it has much less exposure to the beleaguered Boeing (NYSE:BA) stock than competitors like ITA. While Boeing is a top 10 holding for PPA, its 4.1% weighting within the fund makes it a much more manageable position than ITA’s 14.0% weighting in the troubled aerospace giant.
Best-in-Class Performance
PPA has generated an excellent annualized return of 14.2% over the past three years and excellent annualized returns of 11.4% and 12.7% over the past five and 10 years, respectively.
These are pretty solid results on their own, and these results are more notable in that PPA has decisively outperformed its peers like XAR and ITA recently.
For example, XAR has returned 5.4% over the past three years, 8.2% over the past five years, and 11.3% over the past 10. Meanwhile, ITA has returned 11.2% over the past three years, 5.3% over the past five years, and 10.1% over the past decade.
As you can see, PPA outperformed both of these peers over each time frame, especially over the past three and five years.
What Is PPA’s Expense Ratio?
PPA has an expense ratio of 0.58%, meaning that an investor putting $10,000 into PPA will pay $58 in fees annually. Interestingly, this is right in line with the average expense ratio for all index ETFs, which stands at 0.57%, but it’s also more expensive than that of peers like XAR and ITA, which charge 0.35% and 0.40%, respectively.
The fact that PPA is more expensive than its two closest competitors is the primary downside here. However, the fact that it has soundly outperformed these competitors over the past three and five years means that it can make a case that this higher fee is justified. If it keeps outperforming, most investors probably won’t mind.
Does PPA Pay a Dividend?
PPA is a dividend payer. While its yield of 0.6% certainly isn’t the main draw here, it is an added bonus for investors. The fund has consistently paid dividends since its inception in 2005.
Is PPA Stock a Buy, According to Analysts?
Turning to Wall Street, PPA earns a Moderate Buy consensus rating based on 41 Buys, 11 Holds, and two Sell ratings assigned in the past three months. The average PPA stock price target of $107.49 implies 8.6% upside potential.
The Takeaway: A Good Way to Invest in Aerospace and Defense Stocks
I’m bullish on PPA going forward, given its strong performance over both the short and long term and the fact that it has outperformed its competition. PPA is a bit wider-reaching and a bit more diversified than its peers, and it gives investors exposure to aerospace and defense stocks that its peers do not, such as General Electric, Honeywell, and Palantir. The defense industry looks like a good sector for investors to gain exposure to, and PPA is a good way to do it.
