Aerospace and defense stocks and exchange traded funds have been one of the ultimate “Trump trades” since Donald Trump won the November U.S. presidential election. Some analysts and market observers believe the group has more upside in store for investors.
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 stung earlier this year after Trump criticized the Pentagon’s profligate spending habits.
“The major catalyst for the sector in the past few months had been Trump’s proposed commitment to increase defense spending, a point he reiterated in his speech to Congress on Tuesday night,” reports CNBC. “Trump’s call to move ahead with “one of the largest increases in national defense spending in American history” is exactly what leads Mark Tepper, founder of Strategic Wealth Partners, to bank on more room to run for defense stocks, even from a fundamental standpoint.”
ITA is a cap-weighted ETF, meaning it has larger weights to big-name defense stocks, including Dow components Boeing (NYSE: BA) and United Technologies (NYSE: UTX). XAR is an equal-weight ETF. PPA holds 50 stocks “involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations,” according to PowerShares.
“This year alone, stocks like Boeing and Honeywell are up as much as 17 percent and 9 percent, respectively. But even among defense stocks that haven’t hit record highs, names like Northrop Grumman are up more than 25 percent just over the past year,” according to CNBC.
Aerospace and defense stocks are part of the broader industrial sector and have been important drivers of the sector’s performance over the past year. In fact, aerospace and defense names have been industrial leaders. Over the past 12 months, ITA is ahead of the largest diversified industrial ETF by more than 1,100 basis points.
For more information on the defense industry, visit our aerospace & defense category.