Security investors, one of the TIFIN Financial Personality types, are keen on knowing that their investments are protected across market cycles. We sat down with Emles, creators of the Federal Contractors ETF (FEDX), to learn how companies with high exposure to U.S. federal contracts may offer potentially stable through-the-cycle revenues. FEDX returns are designed to correspond to 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.
TIFIN Personality: With all the geopolitical instability the world is facing, there is a compelling case for a flight to security. How does FEDX fit into the current environment?
Emles: In many cases, geopolitical risk translates to market volatility and potential equity drawdowns. FEDX invests in companies that receive a significant portion of their revenues from government contracts, particularly those from the Department of Defense. Aerospace and Defense beneficiaries combine defensive pricing attributes, cyclical upside potential, and dividend income. The portfolio’s outsized allocation to Aerospace and Defense resonates with those seeking portfolio security as the broader market prioritizes names in the business of providing security to armed conflicts.
TIFIN Personality: How do companies with the backing of the U.S. government stand to benefit from the current environment?
Emles: Our research shows that regardless of the geopolitical environment, government spending has only increased over time. As Capitol Hill passes another trillion-dollar spending package, defense spending is expected to increase more than 5% over 2022—representing additional awards beyond already appropriated spending. We like to believe the level of diligence that vets an otherwise massive stream of revenues to contract beneficiaries, has commercial read-throughs as federal spending priorities may be top of mind for street investors on concerns such as COVID, semiconductor shortages, and national sovereignty.
TIFIN Personality: What makes FEDX different from other defense funds?
Emles: FEDX invests in more than just Aerospace and Defense companies. Our selection process parses the federal spending database, and assesses initial eligibility based on current award data from all 10 awarding agencies, not just the Department of Defense. This ensures a diversity of exposures beyond Aerospace & Defense into areas such as Professional Services, Sustainability, and STEM (science, technology, engineering, and math) -related industries.
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TIFIN Personality: What would be some scenarios where there may be increased risk to this model?
Emles: Although government contracts provide reliable revenues to FEDX names, a rotation of equity investment out of defense havens into segments that support broader equity valuations may introduce downside risk to the Fund’s top holdings. Such a catalyst might be an abatement of the armed conflict between Ukraine and Russia. Macro-level risks such as increased inflation to manufacturing materials, cost of labor, and further accumulation of manufacturing backlogs may impact how investors price those affected names.
TIFIN Personality: What lays ahead for federal spending?
Emles: We expect federal contracts from the Department of Defense will continue to benefit top FEDX positions. As COVID related spending sheds emergency subsidies and government spending reprioritizes, we expect funding to appropriate towards high-capacity manufacturing as part of broader efforts to increase American competitiveness and strategically decrease reliance on imports.
Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the Fund’s prospectus, which may be obtained by visiting www.emles.com or by calling +1 (833) 673-2661. Please read the prospectus carefully before you invest.
Investing involves risk, including possible loss of principal. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Small and mid-capitalization companies may be more vulnerable to adverse business or economic events than larger, more established companies. Investments in derivatives involve a number of risks, including counterparty risk, illiquidity, and losses greater than if they had not been used. Investments in foreign securities may involve risks such as social and political instability, market illiquidity, exchange-rate fluctuations, a high level of volatility and limited regulation. Events or conditions in one region or financial market may adversely impact issuers in a different country, region or financial market. Global events such as the current novel coronavirus (COVID-19), terrorist attacks, natural disasters, social and political discord or debt crises and downgrades, among others, may result in market volatility and have long term effects on both the U.S. and global financial markets.
The Fund is non-diversified, which means that it may invest more of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund. As a result, the Fund may be more exposed to the risks affecting an individual issuer or a smaller number of issuers than a fund that invests more widely. This may increase the Fund’s volatility and cause the performance of a relatively smaller number of issuers to have a greater impact on the Fund’s performance. The Fund is not actively managed and would only sell shares of an equity security if that security is removed from the Index or the Index is rebalanced. Please see the prospectus for details of these and other risks.
Foreside Financial Services, LLC, Distributor
Federal Contractors ETF (FEDX) provides compensation to TIFIN or one its subsidiaries to be a sponsored fund which provides the fund greater visibility. This material is provided for informational purposes only and should not be construed as individualized investment advice or an offer or solicitation to buy or sell securities tailored to your needs.
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