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]
The PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) is up 7.4% this year. PPA does offer ample exposure to the heavyweights of the aerospace industry, such as Boeing and United Technologies, but the ETF also features robust exposure to mid- and small-cap names as those market capitalizations combine for almost 60% of the ETF’s weight.
PPA has taken in $35 million of its $133.3 million in AUM this year and over the past month, it was one of the better PowerShares ETFs in terms of inflows.
The SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) has been a decent performer this year as well and is coming of a 2013 in which it tussled with ITA for top honors among all non-leveraged industrial ETFs. http://www.etftrends.com/2014/01/aerospace-etf-showdown-so-good-its-hard-to-go-wrong/
Home to 37 stocks, XAR uses more of an equal weight approach to aerospace group, though the ETF’s weighted average market value of $20.5 billion indicates the fund is not excessively exposed to small-caps. There has been talk that industrials are somewhat expensive on valuation, perhaps the result of significant run-ups in the groups largest constituents dating back to 2013.
The high valuations are seen more in cap-weighted fare as ITA sports a P/E ratio of 21.2 compared to 16.8 for XAR. https://www.spdrs.com/product/fund.seam?ticker=XAR
SPDR S&P Aerospace & Defense ETF
