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.

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.

Looking ahead

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.

Full performance and holdings information can be found here.  

Tags: etf, Federal contractors, growth