Aerospace and defense exchange traded funds, including the iShares U.S. Aerospace & Defense ETF (Cboe: ITA), were among the best industry level performers last year, but amid fears of trade wars, the group has slumped in 2018.
For example, ITA entered Friday with a one-week loss of over 5% and was dangerously close to following below its 200-day moving average. Still, some analysts believe aerospace and defense stocks can get their momentum back.
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. Rivals to ITA, the largest ETF in this market segment, include the PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) and the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR).
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.
Expert View on Aerospace
Wells Fargo’s Sam Pearlstein “writes that defense stocks have historically outperformed most years. One recent period of underperformance, in 2009-2010, was largely due to worries about the sequester caps that came into play amid congressional wrangling about the budget, a situation he doesn’t see as similar to today,” reports Teresa Rivas for Barron’s.
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.
Pearlstein also “thinks that another big factor pressuring defense stocks has been the selling of industrials–if investors are unloading their holdings via exchange-traded funds (ETFs) and other baskets, that means that defense names are being sold too, even though worries about a cyclical peak should be a good environment for defense,’” according to Barron’s.
Traders looking for a more aggressive play on aerospace equities can consider the Direxion Daily Aerospace & Defense Bull 3X Shares (NYSEARCA: DFEN). DFEN, which debuted earlier this year, seeks to deliver triple the daily returns of the Dow Jones U.S. Select Aerospace & Defense Index.
For more information on the defense industry, visit our aerospace & defense category.