Aerospace stocks and exchange traded funds have been among the most obvious beneficiaries of Donald Trump’s stunning ascent to the White House, a theme some investors will continue after Trump officially takes the Oval Office later this month.
Other potential catalysts for aerospace ETFs include 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.
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.
However, the iShares U.S. Aerospace & Defense ETF (NYSEArca: ITA), PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) and the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) were pinched somewhat last month after Trump criticized the Pentagon’s profligate spending habits.
Defense stocks were limping after Trump censured the rising weapons spending, specifically targeting Lockheed Martin Corp.’s F-35 Fighter jet program, the Pentagon’s most expensive weapons system, Bloomberg reports.
“The political environment favors investment in the Aerospace and Defense industry. Both ITA and PPA appear to be better positioned than the S&P 500 in general for a rising interest rate economic environment. Technical analysis shows that there doesn’t appear to be any significant advantage to wait as a breakout could happen at any time,” according to a Seeking Alpha analysis of the various Aerospace ETFs.
Trump has criticized the “revolving door” nature of the industry as many who negotiated the deals between the government and firms often end up working for the industry down the line.
ITA, a cap-weighted ETF and the largest of the aerospace ETFs, is higher by nearly 27% over the past year, but has traded modestly lower to start 2017 and is currently finding support at its 20-day moving average.
“In my opinion, ITA is the better choice of ETF, given lower management expenses and greater assets under management, understanding that there may be slightly higher risk going forward due to less cash on hand in a rising interest rate environment,” according to Seeking Alpha.
For more information on the defense industry, visit our aerospace & defense category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.