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 Q4 2020
U.S. markets finished a volatile year on a high note, and the S&P 500 Index hit all-time highs in the midst of a pandemic. While federal contractors faced uncertainty regarding the outcome of the U.S. elections and its effects on federal spending, contractors showed resilience through year-end.
- Contributors: An allocation to industrials and stock selection in the IT sector aided portfolio performance
- Detractors: An underweight allocation to all sectors except industrials, particularly energy and financials sectors which had strong returns in the quarter, detracted from fund performance
- Outlook: Industrials stocks remain the only overweight exposure. Due to a high allocation to aerospace & defense stocks, performance of the portfolio may be sensitive to any changes in federal spending after recent elections
Quarter in review
- The Fund outperformed the benchmark, the S&P 500 Index, from inception on October 14, 2020, to quarter-end on December 31, 2020.
- An overweight position in Raytheon Technologies Corp. (15.3% portfolio weighting at inception) was the top contributor as investors began to rotate back to the aviation sector in hopes of a significant recovery in 2021. Its shares, along with the rest of the federal contractor cohort, saw an additional uplift on receding chances of a defense budget cut stemming from election outlooks in November.
- An overweight position in L3Harris Technologies, Inc. (11.7% portfolio weighting at inception) also contributed after positive Q3 earnings results, where L3Harris reported strong year-to-date bookings and international opportunities. The company targeted mid-single-digit revenue expansion in the coming year, in-line or better than peers Northrop Grumman and Lockheed Martin.
- 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 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.