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 Q3 2021
For the quarter ended September 30, 2021, Fund positions delivered -4.36% at NAV versus a benchmark return of -9.68% by the S&P Aerospace & Defense Industry Index over the same period.
- Contributors: General Dynamics, L3Harris
- Detractors: Kratos, Lockheed Martin
- Outlook: The portfolio remains sensitive to beneficiary details from FY2022 Defense Budget planning. Though the requested FY2022 budget was higher than the enacted FY2021 budget, figures show that the Pentagon intends to boost R&D contracts while paring back procurements—amounting to a 2% decrease in appropriations that would traditionally benefit defense contractors.
Quarter in review
Both the Fund and its S&P Aerospace & Defense Industry benchmark underperformed as unanchored expectations around the FY2022 Defense Budget adapt to a dynamic palette of priorities from the White House and Pentagon.
Shares of General Dynamics outperformed peers over 3Q2021 with a 42 basis point contribution to portfolio performance as investors rationalized FY2022 Defense Budget awards to GD across C4I, Shipbuilding (Submarines), and Ground Transport. Consensus EPS estimates saw an increase of 4.93% over 3Q2021 as investors begin pricing in a $39 billion backlog of submarine work—a General Dynamics specialty.
We remain overweight Aerospace & Defense as top names expect contract flow to selectively boost revenues. We believe that the combination of Federal R&D commitments and contractors’ ability to innovate will reward shareholders over time in the form of expanded revenue opportunity across federal mandates.
We continue to believe that COVID-19 related spending across government agencies may find synergies with defense contract spending and provide additional growth potential for FEDX names. Early pandemic spending towards government IT modernization resonates with expanded appropriations towards “Command, Control, Communications, Computers & Intelligence” (C4I) offerings from the likes of L3Harris and General Dynamics