U.S. stocks were rattled last week after a militant faction of al-Qaeda was seen leading a new insurgency in Iraq. Heightened tensions in an already volatile part of the world helped snap a multi-week winning streak for the S&P 500.
Aerospace and defense exchange traded funds did not react as expected with the iShares U.S. Aerospace & Defense ETF (NYSEArca: ITA) shedding 1.6%, but some investors believe the escalation of conflict in Iraq could drive the already high-flying sub-sector of the sturdy industrial group higher.
However, “escalation doesn’t necessarily mean investors will flock to defense stocks solely on expectations they will see a revenue boost as a result of an increase in new government contracts,” reports Chuck Mikolajczak for Reuters.
Although tempering one’s enthusiasm for a potential near-term run-up in aerospace and defenses ETFs is the prudent approach, it is worth noting these funds have already been key contributors to the broader industrial sector’s strength this year.
Bolstered by the likes of Dow components General Electric (NYSE: GD), United Technologies (NYSE: UTX) and Boeing (NYSEArca: BA), which combine for over 20% of the ETF’s weight, the Industrial Select Sector SPDR (NYSEArca: XLI) has been a solid performer this year. Among sector ETFs, only the Energy Select Sector SPDR (NYSEArca: XLE) has taken in more new assets this year than XLI. [Industrial ETFs Enjoy Value Binge]
There is evidence to suggest that dedicated aerospace and defense ETFs do not need tensions in Iraq to escalate to run higher, though that could be a positive catalyst for funds such as the Shares U.S. Aerospace & Defense ETF.
ITA allocates about 31% of its combined weight to United Technologies, Boeing, Lockheed Martin (NYSE: LMT) and General Dynamics (NYSE: GD). The ETF has brought in $145.3 million in new assets this year, or nearly a third of its current assets under management total. [Government Programs Send Aerospace ETFs Flying]