The Industrial Select Sector SPDR (NYSEArca: XLI) is up 8% year-to-date, reaffirming its status as a “Trump trade” and that cyclical sectors remain in style.
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. Increased infrastructure spending is also seen as a catalyst for industrial stocks and ETFs.
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.
Rivals to XLI include the Fidelity MSCI Industrials Index ETF (NYSEArca: FIDU), iShares U.S. Industrials ETF (NYSEArca: IYJ) and the Vanguard Industrials ETF (NYSEArca: VIS).
“Industrial stocks provide opportunities for several styles of investors. They also provide a few bombs that might entice others to buy stocks that are still in serious decline. As for a macro comment on the market and the economy, the signals are a bit mixed. But with more stocks rising than falling, they do lean toward the positive side,” reports Michael Kahn for Barron’s.
Even diversified industrial ETFs such as IYJ have significant aerospace exposure. For example, three of IYJ’s top 10 holdings are dedicated aerospace and defense companies while several other industrial conglomerates have large exposure to the aerospace and defense industries.
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) are the aerospace industry ETFs benefiting from the Trump trade.
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.
In addition to political rhetoric, 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.
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