This Exchange-Traded Fund Tracks Your Tax Dollars at Work

Regardless of your politics, I think we can all agree that if there's one thing the U.S. federal government can do well, it's spend money. Given our government's propensity to spend whatever dollars it can get its hands on, or as of late, create out of thin air, tracking a group of companies that tend to benefit from these contracts, frankly, just makes sense. And the funds themselves are tracked. The 2014 Data Act, which expanded the Federal Funding Accountability and Transparency Act of 2006, mandated the disclosure of direct federal agency expenditures and link those contracts, loans, and grants to specific programs, allowing taxpayers to follow those dollars. Now, let's look at a fund that stands to benefit: Emles' FEDX Exchange-traded fund issuer and index provider Emles on Oct. 14, 2020 launched the Emles Federal Contractors ETF . The fund has a 60-basis point expense ratio meaning that a shareholder with $1,000 invested over a calendar year would pay $6 in fees over that period. The fund is passive and tracks the Emles Federal Contractors Index, which is calculated by Standard & Poors' custom index group, meaning that the intellectual property of the index was developed and is owned by Emles, but S&P manages the operational aspects of calculating and disseminating the index. Looking through the index methodology, I like what I see. I like it because not only is the strategy a straightforward one, but the implementation of the strategy is straightforward, as well. The first and most important step is that analysts head over to https://www.usaspending.gov/ and pull down contract and spending data. The website has application programming interface capabilities, so it's really some code that does this. They then cross this information with reported company revenues. Any name that shows at least 40% revenue exposure to government spending makes the initial cut. The rest of the methodology is focused on constituent liquidity with names requiring at least 100,000 shares traded on a daily basis as well as an average daily value traded of $10 million, although the methodology spells out that the index committee can override this metric if deemed appropriate. From my perspective, I would just stick with the average dollar value traded filter as it cuts right to the chase. Same with the rule that requires an average daily share price of $5 over the past six months. I generally rely on exchanges to police low share prices through their listing rules. The index also has a $100 million minimum market cap threshold. My Take What caught my eye about this fund is that in the year-to-date period to April 6, the fund has returned 10.63% on a total return basis as compared to a 6.11% total decline for the SPDR S&P 500 ETF Trust . Not only did it beat SPY but was the top returning non-energy or basic materials-focused ETF through this period. Perhaps unsurprisingly, as shown in the chart below, FEDX saw a big share price jump in the days following the Russian invasion of Ukraine, even before the U.S. government was able to draft a formal response, let alone draw up budget memos. Given the already planned infrastructure spending in addition to follow-on effects of the ongoing war in Ukraine, like U.S. energy infrastructure development, future Ukrainian rebuilding efforts, and even the shift away from Russian-produced space rockets, there are a number of tailwinds for this strategy. The only thing that caught my eye was a $3.42 per share Short Term Capital Gain that the fund issued in 2021. I'm not sure what caused that distribution given the tax efficiency of the exchange-traded fund creation redemption process, but this might be something to monitor going forward. While this fund is not immune to shocks, like the Dec. 17 to Dec. 21, 2021, 14% drop, over the mid- to long-term, it does a good job capturing the strategy. The only thing I will mention is that the concentration of weapons and defense companies in this portfolio would definitely keep it out of the Franciscan Sisters of Mary portfolio. That said, the low assets under management in FEDX should not be a deterrent to anyone looking to make the best out of profligate government spending. Remember, while the fund may be small from an assets under management perspective, it provides investors access to over $700 billion of strategy market cap so don't be shy about dropping that ticket if you understand and like this strategy.

This Exchange-Traded Fund Tracks Your Tax Dollars at Work

Uncle Sam loves to spend, and the Emles Federal Contractors ETF has a novel way to make money off of companies that rely on federal dollars.

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