The most recent terror threat that was thwarted by intelligence
agencies involved the shipment of explosives via cargo jets. This
is just a long line of attempted terror plots against the U.S. ,and
more specifically, the airline industry. It got me thinking about
ETFs that are well positioned in this age of global terrorism.
The stock market took it all in stride last Friday as details of
the plot were being released, which sort of surprised me because it
was a close call. Typically stocks would sell off when such news
hits the wires, especially heading into a weekend.
What did move was gold, which didn't surprise me. In uncertain
times it's the one area investors almost always turn to. The SPDR
Gold ETF (NYSEArca:GLD) gained 1 percent.
But beyond knee-jerk investor reactions to unsettling headlines
about violent extremists, I want to lay out a few strategic ETF
choices investors have at their disposal these days, notably those
that canvass the defense industries. But first a little bit more
about airlines and their resilience.
Airlines And Transport ETFs
One of the biggest risks of owning an airline ETF is the threat
of a terror attack on a commercial flight.
Such an incident will not only kill innocent people, but will
also have grave effects on future air traffic. It could set the
industry back a decade. The same type of risk also exists with
other means of transportation, and IYT will incur that added
Indeed, even though the terrorist target was the transportation
industry, the iShares Dow Jones Transportation Average Index Fund
(NYSEArca:IYT) was up 0.4 percent on the day. Even more surprising
is the fact that IYT continued to rally, closing two days later at
its highest level in over two years.
The main target of the attack was FedEx (
) and United Parcel Service (
), which are in the top four holdings of IYT. Other than the
delivery-service sector, the ETF also has exposure to railroads,
trucking and airlines. It has a total of 21 stocks and an expense
ratio of 0.47 percent.
The Guggenheim Airline ETF (NYSEArca:FAA) was down slightly the
day of the terror scare (-0.3 percent), but similar to IYT, hit a
new multiyear high in the next week. The ETF is heavily in U.S.
airlines, such as United Continental Holdings (
) and Southwest Airlines (
). The U.S. makes up 75 percent of the allocation, and the expense
ratio is 0.65 percent.
Perhaps it's the fact that the terrorists were thwarted that the
market brushed it off. Or it could be that investors have become
complacent regarding potential attacks, and therefore are numb to
Other than gold and some forms of fixed income, the one sector
that could help hedge a portfolio against potential terror threats
is aerospace and defense.
The PowerShares Aerospace & Defense ETF (NYSEArca:PPA) and
the iShares Dow Jones US Aerospace & Defense ETF (NYSEArca:IAT)
both gained 0.2 percent that day of the terror threat and didn't
experience a pickup in volume.
PPA is made up of a basket of 57 stocks that are related in that
they are all tied to U.S. defense, homeland security and aerospace
operations. The top holdings are the large-cap names in the
), Honeywell International (
) and United Technologies (
). The expense ratio is 0.60 percent, and the ETF's priced has
climbed 6 percent this year.
IAT has only 32 stocks, but its top holdings are similar, with
UTX and BA the No. 1 and No. 2 holdings, respectively. The one
major difference is that HON, which is PPA's top holding, is not
part of ITA. This may be one reason that ITA has been able to
double the return of PPA year-to-date, gaining 12 percent. The
expense ratio is 0.48 percent.
In reality, there's no true way to defend against the unknown.
And honestly, if a terror attack were to occur ,the last thing on
my mind would be my money. That said, investors could use ETFs such
as IAT or PPA to lower the overall risk of their portfolio should
some tragic attack actually occur.
Matthew D. McCall is editor of The ETF Bulletin and
president of Penn Financial Group LLC, a Ridgewood,
N.J.-based wealth management firm specializing in investment
strategies using ETFs.
Don't forget to check IndexUniverse.com's ETF Data
2010 Index Publications LLC
. All Rights Reserved.