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 Q2 2021
The Fund returned a modest 2.82% on the quarter, underperforming industry benchmarks as investors separate names best positioned to benefit from the Biden administration’s budget planning from those that might not.
- Contributors: The Fund’s dividend yield was the top contributor to quarterly performance, beyond any weighted price return on a name or sector.
- Detractors: Non-secular drivers spread losses across names outside top defense allocations.
- Outlook: The portfolio remains sensitive to details around which names might benefit from Defense Budget planning. Though the requested FY2022 budget is higher than the enacted FY2021 budget, it is not clear that all names will have exposure to that spend.
Quarter in review
The Fund underperformed its benchmark, the Dow Jones US Select Aerospace & Defense Index, from March 31, 2021 to June 30, 2021 by 2.67%.
Among top defense names, Northrop Grumman is perhaps best positioned not only as a substantial beneficiary of upcoming federal spend programs (for example, B-21 bomber development, space programs, ground programs) but also from a corporate finance perspective, where the company intends on buying back over $2 billion in shares and paying down debt facilities.
We remain overweight on Aerospace & Defense as top names see sustained domestic contract flow contributing to top line revenue growth—and in many cases is supplemented by foreign revenue streams beyond U.S. federal government spending. Factoring in forward earnings estimates, our research shows that top defense names continue to trade at a relative discount to the broader S&P 500.
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 the remainder of 2021.