This week, aerospace and defense stocks like Lockheed Martin (etftrends.com/quote/LMT), Boeing (etftrends.com/quote/BA), General Dynamics (etftrends.com/quote/GD), and Raytheon (etftrends.com/quote/RTN) are set to release their third-quarter earnings, which could give the sector’s exchange-traded funds a boost.
Last month, the Senate approved a wide-ranging, $854 billion bill that includes a $675 billion allocation towards the Defense Department, accounting for almost 80% of the total bill. In short, the United States doesn’t skimp on defense spending.
Additionally, such a large allocation towards defense didn’t receive much contention as Senators approved the bill 93-7.
“Critically, after subjecting America’s all-volunteer armed forces to years of belt-tightening, this legislation will build on our recent progress in rebuilding the readiness of our military and investing more in the men and women who wear the uniform,” said Senate Majority Leader Mitch McConnell, R-Ky.
McConnell’s comments buttress the willingness of the U.S. government to open their wallets for defense spending–an estimated $610 billion goes towards defense, besting the money spent by the next seven countries combined.
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In turn, defense stocks have been reaching all-time highs with aforementioned names like Boeing, Raytheon, Lockheed Martin and L3 Technologies leading the way. As such, the gains in equities have been spilling over into ETFs and here are four to keep an eye on as earnings results are revealed, starting with Lockheed Martin on Tuesday.
1. iShares U.S. Aerospace & Defense ETF (Cboe: ITA): 16% YTD
ITA seeks to track the investment results of the Dow Jones U.S. Select Aerospace & Defense Index composed of U.S. equities in the aerospace and defense sector. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index, which measures the performance of the aerospace and defense sector of the U.S. equity market. Aerospace companies in the index include manufacturers, assemblers and distributors of aircraft and aircraft parts.
2. PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA): 14.75% YTD
PPA seeks to track the investment results of the SPADE® Defense Index, which was composed of common stocks of 54 U.S. companies whose shares are listed on the New York Stock Exchange (“NYSE”) or the NASDAQ. These companies are engaged principally in the development, manufacture, operation and support of U.S. defense, military, homeland security and space operations.
3. SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR): 20.13% YTD
XAR seeks to provide investment results that correspond generally to the total return performance of the S&P Aerospace & Defense Select Industry Index, which represents the aerospace and defense segment of the S&P Total Market Index (“S&P TMI”).. In seeking to track the performance of the S&P Aerospace & Defense Select Industry Index (the “index”), the fund employs a sampling strategy.
4. Direxion Dly Aerospace&Def Bl 3X ShsETF (NYSEArca: DFEN): 41.12% YTD
DFEN seeks daily investment results equal to 300% of the daily performance of the Dow Jones U.S. Select Aerospace & Defense Index, which attempts to measure the performance of the aerospace and defense industry of the U.S. equity market. With its triple leverage, DFEN has produced astounding results–23.31% YTD and almost 65% within the last 12 months.
A number of market analysts feel that this run in the aerospace and defense sector could continue even after the extended bull market continues to lose steam and delve into a full-blown correction. According to MarketWatch investing columnist Philip Van Doorn, “stock prices tend to be driven by increases in earnings. The federal income tax cuts that went into effect this year will no doubt boost profits and potentially share prices. But that party will surely end, after which it is reasonable to expect the aerospace and defense subsector to continue to outperform the broader market.”
Even amid geopolitical tensions brewing in Saudi Arabia, some analysts are predicting that it will be nothing short of a mere blip on the radar screen for defense stocks.
“The Saudi Arabia situation does not affect the overall picture in a way that materially changes U.S. defense stock fundamentals,” said Carter Copeland, founding partner at Melius Research.
“Defense stocks already trade at high multiples because of macro fears elsewhere and the ongoing complexity of the geopolitical threat environment,” Copeland added.
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