Industrial stocks were laggards last year and that theme is continuing again in 2015 as the Industrial Select Sector SPDR (NYSEArca: XLI) is up just 0.11% compared to a 2.2% gain for the S&P 500.
Fortunately, aerospace and defense stocks have not gotten the memo about the industrial sector’s laggard status. The SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) was one of 108 exchange traded funds to hit all-times high Monday, helping bring the fund’s year-to-date gain to 8.3%. Avid followers of aerospace ETFs will remember that XAR was 2013’s top-performing industrial ETF when the aerospace and defense sub-sector delivered stellar returns. [Meet a High-Flying Industrial ETF]
Last week, Deutsche Bank raised its price targets on Northrop Grumman (NYSE: NOC), L-3 Communications (NYSE: LLL), Huntington Ingalls Industries (NYSE: HII) and General Dynamics (NYSE: GD) by an average of 8.5%. That quartet combines for 14% of XAR’s weight. As an equal-weight ETF, no single stock garners a weight of more than 3.6% in XAR’s lineup.
“The bottom line for investors is that spending will stay strong for the foreseeable future. That makes these solid holdings for growth and income accounts,” reports Lee Jackson for 24/7 Wall Street.
The average dividend yield on the aforementioned stocks is just 1.7% and XAR’s trailing 12-month yield is just 1%. However, that implies ample room for dividend growth. Catalysts that could lead to further upside for XAR in 2015 include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.
With a weight of almost 3.5%, Dow component Boeing (NYSE: BA) is another important driver of XAR’s performance. These days, that is a good thing.
“Powered by its strong earnings growth of 25.46% and other important driving factors, this stock has surged by 26.07% over the past year, outperforming the rise in the S&P 500 Index during the same period,” reports Laurie Kulikowski of TheStreet.com on Boeing.
XAR is also home to Dow component United Technologies (NYSE: UTX). Boeing is one just nine Dow stocks up at least 5% this year. United Technologies is up nearly 4%. Orders for new commercial aircraft are at historic highs due to airlines replacing aging fleets and/or expanding current fleets.
Although the aerospace and defense industry is perceived as being beholden to Uncle Sam’s whims, the allure of late-cycle sectors, including industrials, in a rising rate environment remains in place. Industrials perform well when interest rates rise because rising rates can go hand-in-hand with economic growth.
The aerospace-defense group has a beta of 1.9 to U.S. GDP growth compare to 1.7% for the S&P 500. [Stealthy Aerospace ETF Surges]
SPDR S&P Aerospace & Defense ETF
