Aerospace and defense ETFs are among the top-performing sector funds the past three months, overcoming fears related to government spending cuts and sequestration.

For example, iShares US Aerospace and Defense ETF (NYSEArca: ITA) and the PowerShares Aerospace and Defense (NYSEArca: PPA) have rallied nearly 20% for the trailing three months.

Top holdings Boeing (NYSE: BA), Lockheed Martin (NYSE: LMT), Northrop Grumman (NYSE: NOC) and General Dynamics (NYSE: GD) all posted better-than-expected quarterly earnings this week, even though U.S. defense spending has been slashed by sequestration cuts after Congress failed to come to an agreement on the federal budget. [Aerospace and Defense ETFs Face Debt Ceiling, Spending Cuts]

Sequestration will cut some $1 trillion from the defense budget over the next decade, according to The Washington Free Beacon.

Yet the aerospace and defense industry is holding up well this year due to technological innovations, big contracts, acquisitions and growing commercial demand, according to Zacks Equity Research.

“Since the domestic aerospace and defense sector is facing budget cuts and a constrained spending environment from the U.S. government, the industry is looking for growth from international orders,” Zacks reported. “Additionally, a number of new emerging markets as well as developed nations, such as India, Japan, the United Arab Emirates, Saudi Arabia and Brazil, are boosting defense spending and generating business for the U.S. aerospace and defense companies.”

Still, Boeing CEO Jim McNerney said the company has not yet seen most of the impact from U.S. budget sequestration on its earnings, Reuters reports.

“We are not out of the woods at all,” he said in a conference call Wednesday. “We are entering the woods.”

iShares US Aerospace and Defense ETF

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