It’s been a rocky August so far for U.S. investors. They have been yet again reminded markets don’t only move in one direction. And volatility can come in with extreme velocity when you least expect it. As the S&P 500 slides some 5% month to date, calls for portfolio diversification, protection, and hedging have been ringing loud.
Risk management is easy to implement with ETFs, with many strategies offering different levels of participation, diversification, and protection. One way to think about it in a U.S. presidential election year is to look for areas of the market where some bipartisan agreement exists regarding priority and government spending.
Two areas come to mind where a shared vision across the aisle could bode well for growth regardless of market environment:
- Infrastructure
- Aerospace & Defense
About Infrastructure
Infrastructure has been a big theme in the U.S. for quite a while. There is ample research and commentary giving the state of U.S. infrastructure barely a passing grade. But there’s bipartisan legislation in place, such as the Infrastructure Investment and Jobs Act, allocating cash to the problem. The IIJA, enacted in late 2021, has assigned some $1.2 trillion to revamp and improve U.S. infrastructure.
According to data provided by Global X, nearly three years in, about one-third of that investment has been deployed so far — some $450 billion — to fund more than 50,000 projects. There have also been massive private investments made in U.S. manufacturing and energy infrastructure thanks to supportive legislation. That is to say that investments are being made in infrastructure, but there’s a lot more to go.
As a theme, that makes infrastructure an interesting diversifying-growth opportunity. Many companies are directly involved, as well as those providing ancillary support sitting at the frontline of that government spending.
Investors have many infrastructure-focused ETFs to choose from. The largest, with almost $8 billion in assets, is the Global X US Infrastructure Development ETF (PAVE ).
Infrastructure ETFs tend to lean heavily into utilities, but PAVE is well-diversified across sectors. It delivers a mix of names involved, with construction companies, industrials, and materials as well. Top names in the portfolio include companies like Trane Tech, which is in heating and cooling, and is up 34% year to date. Eaton Corp, which is in power management, is up some 15% so far this year. Emerson Electric is up some 7%, as is Martin Marietta Materials. All three companies exist among top holdings.
There are other ways to slice this theme. Two examples include the iShares U.S. Infrastructure ETF (IFRA ), which breaks up the portfolio into two equally weighted buckets. One focuses on what the firm calls operators, such as utilities, and enablers, such as construction names and materials. Another approach is the JPMorgan Sustainable Infrastructure Fund (BLLD ), which adds sustainability to the theme, focusing on companies involved with sustainable energy, digital, and medical infrastructure, among other things.
These are just some of the ETFs offering access to this theme, which we could argue may also include a subsegment focused on the U.S. reshoring trend. The effort to rebuild, bring back to, and strengthen supply chains/production in U.S. soil requires infrastructure investment across sectors and segments. ETFs like the iShares U.S. Manufacturing ETF (MADE ), the Engine No. 1 Transform Supply Chain ETF (SUPP ) and the Aztlan Nearshoring Stock Select ETF (NRSH ) are unique plays here, capitalizing on the “made in America” movement.
You can see a list of infrastructure ETFs here.
About Aerospace & Defense
Geopolitical risk is high, with ongoing conflicts taking place around the world this year. Defense is a theme that generally enjoys some bipartisan support when conflict rages on. And military spending can be relatively immune to market cycles, making the theme a unique diversifier.
Earlier this year, the U.S. administration increased the budget request for the Department of Defense by 4.1% year on year, which, according to nonprofit, nonpartisan research group Brookings Institution, “by any measure—but particularly in this election year and in this era of competing budget priorities—that is an enormous amount of money.”
Defense is big business, and there are many ETFs accessing this theme in unique ways. Consider a few. The biggest ETFs in this segment include the iShares U.S. Aerospace & Defense ETF (ITA ) and the Invesco Aerospace & Defense ETF (PPA ). Names like Howmet Aerospace, Northrop Grumman, and Lockheed Martin exist among top holdings, as is Boeing, which sits at about 10% of ITA and about 6% in PPA.
The SPDR S&P Aerospace & Defense ETF (XAR ) equal-weights the universe of stocks, offering additional diversification that tilts a little smaller-cap thanks to the methodology. These three ETFs — ITA, PPA, and XAR — command the bulk of assets tied to this category, nearing $12 billion in combined assets.
There are also other takes on this theme. These include the Global X Defense Tech ETF (SHLD ), which has led this segment with strong performance this year. That’s because the fund excludes names like Boeing due to source of revenues. About 55% of Boeing’s revenues are tied to its commercial airplane business, not military activities. And SHLD sets out to be as pure-play as possible on the theme. In a year when Boeing stock has dropped some 30%, this is an exclusion that has worked well for the fund.
You can see a list of aerospace & defense ETFs here.
Finding Your Thematic Exposure
When it comes to thematic investing, funds within categories tend to offer very different takes on a theme. So it’s important to consider how pure-play and concentrated and/or how broadly diversified a strategy is to make sure you’re choosing the fund that best matches your view of the opportunity set and its respective path of returns.
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