In theory, things should not have been this good this year for aerospace and defense stocks and the exchange traded funds that house them.
Debt ceiling debates and sequestration were seen as hurdles to the industry. In reality, all three dedicated aerospace and defense ETFs have soared this year, but the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) has been the leader with a year-to-date gain of 44.3%. [10 Small Sector ETFs With Big Returns]
Although the aerospace and defense industry is perceived as being beholden to Uncle Sam’s whims, the outlook heading into next year is bright and that could mean more upside for XAR. One good reason: All that talk of slack earnings growth does not apply to XAR constituents.
“Q3 2013 earnings growth of the A&D industry was 16.1% vs. 4.3% average earnings growth reported by S&P 1500 companies. Markets have responded positively to the strong earnings growth; however, industry relative valuation metrics do not fully reflect this (A&D P/B is currently at a discount to S&P 500, but historically trades at a slight premium) which may present a relative value opportunity,” according to State Street Global Advisors Head of ETF Investment Strategy David Mazza.
XAR is not excessively allocated to the most widely held A&D names, such as Dow components Boeing (NYSE: BA) and United Technologies (NYSE: UTX) or Lockheed Martin (NYSE: LMT). Rather, the ETF is an equal-weight spin on the industry as its top-10 holdings have weights ranging from 4.19% to 5.13%. [ETF Spotlight: Aerospace & Defense]