Monty Rakusen The Industrials sector was a winning area of the US large-cap market for much of the rally off the lows last October. Since the end of April, however, the Industrials Select Sector SPDR ETF (XLI) has sharply underperformed the S&P 500 Trust ETF (SPY) as the focus has once again shifted back to the hot AI plays that dominated price action in 2023. One slice of the Industrials complex that has held up well on both a relative and absolute basis is the Aerospace & Defense industry. But has the rally flown too high? I have a hold rating on the iShares U.S. Aerospace & Defense ETF (BATS:ITA). While I like the general theme given uncertain geopolitical developments and risks, the ETF trades at a premium valuation multiple to the market while its yield is rather paltry. Price action, however, has been very strong so far in 2024. ITA ETF Near All-Time Highs as XLI Loses Relative Steam Stockcharts.comAccording to the issuer, ITA offers investors exposure to U.S. companies that manufacture commercial and military aircrafts and other defense equipment. The fund has targeted access to domestic aerospace and defense stocks and is used to express a sector view. It seeks to track the investment results of an index composed of U.S. equities in the aerospace and defense sector. ITA is the largest ETF for the industry it covers. Total assets under management is $6.4 billion as of June 10, 2024. The ETF’s yield is just 0.85%, about half a percentage point below that of the S&P 500, while its annual expense ratio is not all that high at 0.40%. Share-price momentum has been stellar across timeframes, earning ITA a solid B+ ETF Grade by Seeking Alpha’s Quant system. The focused fund can be risky at times, and that’s evidenced by its concentrated allocation and standard deviation, which is above 17% – high but not extremely so. With a high AUM and holding many familiar blue-chip Industrials-sector equities, ITA sports an A liquidity grade. Average daily volume has been above 350,000 shares in the past 90 days and its 30-day median bid/ask spread is just two basis points, per iShares. Where I grow concerned about ITA today is its P/E ratio. Morningstar lists it at above 22 times while the fund’s long-term EPS growth rate is just fractionally above 10%, resulting in a PEG ratio above two, which is high. But iShares notes that ITA’s equity beta is just 0.67 and prospective investors should consider that if geopolitical risks suddenly brew to the surface, ITA could offer significant diversification benefits (as we saw at times in 2022). ITA: Portfolio & Factor Profiles MorningstarAlong with the premium valuation multiple, ITA is a concentrated ETF. The biggest trio of stocks accounts for more than 45% of the total portfolio. So, if you were to make this a significant holding, then keeping up with both fundamental and technical conditions with RTX Corp (RTX), Boeing (BA), and Lockheed Martin (LMT) is prudent. Playing ITA as a tactical investment theme and a satellite position is likely the better strategy, in my view. ITA: Holdings & Dividend Information Seeking AlphaSeasonally, ITA tends to post mediocre returns now through September. The November through February period has historically been when the fund outperforms. So, it’s hard to glean much insight from seasonal tendencies in the near term. ITA: Neutral Seasonal Trends Through Q3 Seeking AlphaThe Technical Take With a high valuation and concentrated composition, ITA’s momentum situation is robust. Notice in the chart below that shares are up significantly this year. After climbing above key resistance in the $118 to $120 range, the aerospace & defense fund hit all-time highs just below $140. I would not be surprised to see a pause near current levels, though. Here’s why: The range from $102 at the low last October to resistance at $119 was $17. We can project a measured move price objective to $136 based on that $17 height. ITA achieved the target, plus a few bucks, earlier this quarter. With somewhat neutral seasonality ahead, a breather might be due. But take a look at the RSI momentum oscillator at the top of the graph. It has been ranging in the bullish 40 to 90 zone. What’s more, ITA’s long-term 200-day moving average remains positively sloped, suggesting that the bulls control the primary trend. There has been a trend of lower volume lately, perhaps a sign of weakening enthusiasm for shares, but that’s a minor consideration in my eyes. Finally, long-term support begins down at $120. Overall, ITA’s chart situation is positive. The fund made all-time highs recently, hitting its near-term upside target. ITA: Solid Long-Term Trend, Positive RSI Range, Shares Hit Near-Term Technical Target Stockcharts.comThe Bottom Line I have a hold rating on ITA. While I like the long-term trend, the valuation today is to the high side. It’s quite possible that the fund consolidates and grows into the valuation, but I would look elsewhere for a tactical overweight heading into the second half of the year.
sekar nallalu CFA,CMT,Cryptocurrency,ITA,Mike Zaccardi ITA: Outperforming Industrials, But A Questionable Valuation Amid Solid Technicals