Getting To Know The S&P Developed BMI Select Aerospace And Defense 35/20 Capped Index
For ETF investors, the key issue here is not just โaerospace and defense exposure,โ but how the index tries to package a concentrated industry into something tradable. The 35/20 capping framework matters because this is a small universe with a few very large companies. A cap-weighted ruleset can still leave investors heavily dependent on the same leaders, but it aims to reduce single-name dominance and make the basket more usable as a portfolio sleeve.
The sector mix is also important. Aerospace and defense is not a pure defensive play, even if defense contracts can be steadier than commercial aviation demand. The index blends businesses with different economic sensitivities: one side tied to government budgets and procurement cycles, the other tied to travel demand, industrial production, and airline capital spending. That means investors are not getting a simple recession hedge; they are getting a mix of policy-sensitive and cyclical cash-flow drivers.
Geographic concentration is another structural feature worth watching. Even though the benchmark universe is โdeveloped,โ the index leans heavily toward a few countries and a handful of large multinationals. For long-term allocators, that can create a portfolio tension: the theme looks global, but the earnings and policy exposure may still be concentrated in the U.S. and Western Europe. That makes country exposure and defense-spending regimes part of the investment case.
For ETF construction, the practical takeaway is rebalancing discipline. Annual reconstitution and monthly capping can help control drift, but they do not eliminate concentration or valuation risk. Investors using a fund linked to this index should think of it as a targeted satellite holding, not a broad industrial core, and pay attention to how much overlap it creates with existing U.S. large-cap or industrial exposures.
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Theย S&P Developed BMI Select Aerospace & Defense 35/20 Capped Indexย seeks to measure the performance of constituents from the S&P Developed BMI that are classified in the GICS Aerospace & Defense sub-industry, while adheringย to certain size and liquidity criteria. It uses a capped float-market-capitalization-weighted methodology to ensure diversification across its constituents. It is reconstituted annually in September, with a monthly weight capping.
The Aerospace & Defense (A&D) sub-industry is unique, with the defense segment often exhibiting anti-cyclical behavior alongside increases in government defense spending, independent of economic downturns.1ย In contrast, the aerospace segment, especially commercial aviation, is highly cyclical, closely tied to the broader economic cycle and consumer spending on travel.2ย The reliance on long-term government contracts in defense introduces a degree of revenue stability, though it alsoย poses risks tied to changes in political landscapes and defense budgets. Additionally, the A&D sector is often synonymous with technological innovation, contributing significantly to advancements in fields such as autonomous flight systems and cybersecurity, driven by the sectorโs lengthy product development cycles and substantial investments in new technologies.3ย Moreover, the industry is marked by high barriers to entry due to significant capital and technological requirements, high regulatory standards and the need for advanced R&D capabilities. This results in a concentrated competitive landscape with a few major players dominating the global scene.4
The dominance of a few key players in the Aerospace & Defense sub-industry is evident in the indexโs composition, where over 90% of the companies have a market capitalization in excess of USD 10 billion. Among the 56 constituents of the index, the majority are based in the U.S. (67%), followed by France (17%) and the U.K. (9%). This distribution contrasts with its benchmark index, which also has 67% of its constituents domiciled in the U.S., but with a significantly lower representation from France (3%) and the U.K. (4%). The higher concentration in France is largely due to the inclusion of major French firms like Airbus and Safran, which hold index weights of 9.4% and 6.2%, respectively. In the U.K., a significant part of the index weight comes from Europeโs largest defense contractor, BAE Systems (index weight of 4.3%), and Rolls-Royce (index weight of 3.1%).5
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In terms of performance, the S&P Developed BMI Select Aerospace & Defense 35/20 Capped Index has outperformed its benchmark index across most analyzed time frames since 2012. Over the last three years, the index had an annualized return of 15.9%, compared to the benchmarkโs 7.1% annualized return. Over the 10-year period, it also outperformed with a 10.1% annual return compared to theย S&P Developed BMIโs 9.2%. However, it slightly underperformed the benchmark over the last 12 months, returning 14.1% versus the benchmarkโs 15.5%. The index had slightly elevated levels of (annualized) risk over the 10-year period, around 20.9% compared to the benchmarkโs parentโs 15.2%. Over the full back-tested period, the daily return correlation was around 79% with a constituent overlap of 1.5%.6
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1Defense Spending “Cycles” Are An Illusion
2Predictions for the aerospace manufacturing industry
32024 aerospace and defense industry outlook
4Aerospace & Defense (A&D) Contractors
5 Constituent weights as of Jan. 31, 2024.
6 Index levels from Sept. 21, 2012, through Jan. 31, 2024.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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