Capturing The Merger of $RTN & $UTX in ETFs like $ITA and $PPA

An ETF Nerd’s View Of The Combined Companies 

  • Sector or Niche? ETFs that captured 10 Years of Alpha  

Question: A quick glance at the 10 year stock performance by Raytheon (RTN) and United Technologies (UTX) makes you wonder if you could have accomplished the same goal by owning an ETF?

Answer: ITA and PPA, but what may surprise many is the fact that these two ETFs quietly have delivered the same or better performance than the more famous SPDR Technology ETF.  Maybe famous grabs headlines and AUM, but all this talk about how the combination was in part driven  by technology coming from data and AI makes me wonder whether holders of XLK in 2020 will be looking closer at the combined company?

The IShares U.S. Aerospace  & Defense ETF has about  20% exposure to $UTX (16.91%) and $RTN (4.08%) makes capturing the potential upside from the merger of the two companies.  However, the Direxion Daily Aerospace & Defense 3X ETF ($DFEN) looks like a rocketship since its May 2017 launch. Other ETF that hold overweighted positions in the merger include: $CIBR, $XKFF, $DUSA and $XLI. According to the ETF Think Tank Tools UTX at 7.8% is the more owned of the two stocks by ETFs. On average, individual stock ownership  by ETFs is at 6.9%. $RTN is at 6.5%. This is perhaps a function of  flows going mostly into  passive funds so the fact that an actively managed ETF like the Davis Select US Equities (DUSA)  owns 7.2% shows us that active share can matter.

Active Share and Smart Cost 

Active Share describes what ETF Nerds refer to as “going where other broad passive ETF are not going” and highlight the value of paying for something that is different. We think the the term Smart Beta is misleading and believe that Smart Cost   is what investors should seek. DUSA is a high convictions strategy like all of the Davis ETFs. Focusing on large cap U.S. companies DUSA only has a 14% overlap to the SPY.  Not surprising – as the chart below shows. The overlap by other funds is small and by design is most similar to their own funds.  To that point, the Davis Select Worldwide  ETF (DWLD) also carries exposure to UTX – about 4%.

Members in the ETF Think Tank community understand the benefits of active share. We talk about this regularly during our Due Diligence calls.

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