The Emles Federal Contractors ETF (FEDX) seeks investment results that correspond, before fees and expenses, to the price and yield performance of the Emles Federal Contractors Index, an index designed to provide access to companies that have high revenue exposure to federal contracts with the U.S government.
Performance summary of Q1 2021
After finishing a volatile 2020 on a high note, the S&P 500 Index posted new highs in Q1 2021. Federal contractors benefited from growing investor confidence and outperformed the S&P 500, shrugging off uncertainty about federal spending budgets following U.S. elections last November.
- Contributors: An overweight industrials allocation and stock selection in IT sector aided portfolio performance.
- Detractors: An underweight allocation to all sectors except industrials, particularly to energy, financials, and telecoms, which all had strong returns in the quarter, detracted from fund performance.
- Outlook: Industrials stocks remain the only overweight exposure. Due to a high allocation to domestic aerospace & defense companies, President Biden’s “Buy American” campaign may benefit FEDX. The portfolio will remain sensitive to any fluctuations in federal spending, however.
Quarter in review
- The Fund outperformed it's benchmark, the S&P 500 Index, from December 31, 2020 to March 31, 2021.
- An overweight position in General Dynamics Corp. (8.8% portfolio weighting on December 31, 2020) was the top contributor as investors continued to rotate back to the aviation sector to capture upside from ongoing recovery in 2021. General Dynamics reported strong quarterly results in January 2021 despite the Covid-19 pandemic, showing organic growth, healthy cash generation year-on-year, and record-high backlogs.
- An overweight position in AeroVironment, Inc. (3.5% portfolio weighting on December 31, 2020) also contributed, as the company continues to post strong revenue growth during the Covid-19 pandemic. Growing interest in the small drone technologies market has powered AeroVironment’s gains in recent quarters.
- Industrials remain the only overweight as we maintain our conviction in the resilience of U.S. federal government spending overall, which has exhibited strong growth for several decades.
- We continue to believe COVID-19 related spending across all government agencies, including federal spending and contracts, may benefit our portfolio and provide additional growth potential. For example, IT modernization, or spending to help government agencies maintain business as usual despite remote working, is likely to see an uptick in 2021.