As is the case with broader industrial sector exchange traded funds, dedicated aerospace and defense ETFs have struggled somewhat this year, but that does not mean these industry funds are bereft of upside potential.
Last month, United States Air Force announced the winner of an $80 billion competition for the rights to make the new stealth bombers for the military arm. Bloomberg reported Northrop Grumman (NOC) beat out stalwarts Lockheed Martin (LMT) and Boeing (BA) for the contract. The consensus from around the markets seems to be that the contract is a net positive for the sector which can be tracked with the iShares U.S. Aerospace & Defense (NYSEArca: ITA) exchange traded fund.
The three giants make up nearly 25% of ITA’s holdings at the moment as the deal has moved it about 1.5% today as the stocks are projected to rise a bit more.
The PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) and the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR), an equal-weight ETF, are the primary competitors to ITA. On an encouraging note, some technical analysts see good things ahead for the charts of aerospace and defense indexes and stocks.
“The NYSE Arca Defense Index recently emerged from an inverted or upside-down head-and-shoulders pattern. And after a small pause, it now looks ready to break out to the upside through its declining March trendline,” reports Michael Kahn for Barron’s.
Industrial ETFs, including the Industrial Select Sector SPDR (NYSEArca: XLI), have been stymied on multiple fronts. In no particular order, tumbling oil prices have pinched demand for oil services provided by some large- and mega-cap industrial names, such as Dow component General Electric (NYSE: GE), also XLI’s largest holding.
On a related note, slack commodities demand has been a drain railroad operators, an industry group that accounts for nearly 10% of XLI’s weight. And in a perversion of historical trends, airline stocks have not been responsive to oil’s slump and that industry is 5% of XLI’s weight. The good news is that airlines have popped over the past month, but XLI is going to need more help. [Airline ETF Ready to Soar]
“But for the typical investor, one of my favorite strategies is buying newly emerging stocks in strong groups. There are plenty of these setups in the defense sector,” adds Barron’s.
iShares U.S. Aerospace & Defense ETF
