ETF Trends
ETF Trends

The past year has kept the aerospace and defense sector subdued, but increases in spending and other global factors may make this sector’s exchange traded funds (ETFs) a top gun.

In the past month, the aerospace and defense sector has seen some gains in performance and more analysts are feeling bullish on the sector, according to Spade Index. Scott Sacknoff, the index provider for Spade Indexes, which is the underlying index for the PowerShares Aerospace and Defense (NYSEArca: PPA), points out that the sector has been tracking the S&P 500 closely for most of this year. “Things that move the market move the defense sector.”

Some positive factors going for it include:

  • Troops in Afghanistan. President Barack Obama is sending an additional 30,000 U.S. troops to Afghanistan to combat the growing threat of hard-core insurgents and Taliban foot soldiers, reports Al Pessin for VOANews.
  • War Tax. Congress is flirting with the idea of a special tax on high-income Americans to help pay for the war efforts.
  • Boeing’s 787 Dreamliner. The Boeing Co.’s (NYSE: BA) 787 passenger jet “Dreamliner” made its maiden test flight on Tuesday, reports William Hennigan for The Los Angeles Times. The company promises that the Dreamliner will burn less fuel and last longer than other flying aircrafts. Airlines have already ordered 840 Dreamliners worth $140 billion, which made this aircraft the fastest-selling new commercial jetliner in history.
  • Growing threats. Conflict doesn’t magically disappear and there will be a need to combat new threats by increasing offensive weapons. [Are A&D ETFs set to take off?]
  • Economic expansion. Improvements in the economy will lead to job creation, economic growth and improved tax revenue that would help defense spending.

Sacknoff says that there are plenty of differences between perception and reality when it comes to the aerospace and defense sector. Sacknoff says that people tend to compare defense sector cycles alongside the U.S. economy. “The problem with making comparisons is that people tend to think we’re in a safer environment, and the world is not necessarily a safer place.”

A few cases in point: More troops are going to Afghanistan and a pullout, which could take awhile, isn’t expected to begin until 2012. We’re also still in Iraq. Iran seems unwilling to listen to the United States’ warnings, there are computer hackers working day and night to get into the government’s computers. “There’s still a lot of risk in the world,” he says.

Even after 2012, Sacknoff says, defense spending may not abate much as the government uses much of its defense budget to replace things left behind in the wars. That includes bullets, tanks and other equipment.

Many defense companies also benefit from diversification, Sacknoff points out. Many of them have their hands in commercial projects, cyber security and even clean energy. These companies are well aware of the cycles and have positioned themselves to cope as defense spending ebbs and flows.

For more information on the aerospace and defense industries, visit our aerospace & defense category.

  • PowerShares Aerospace and Defense (NYSEArca: PPA): up 22.8% year-to-date; Boeing is 6.4%

  • iShares Dow Jones US Aerospace (NYSEArca: ITA): up 25.8% year-to-date; Boeing is 7.4%

Max Chen and Heather Hayes contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.