Some of this year’s best-performing industry exchange traded funds include aerospace and defense ETFs. For example, the iShares U.S. Aerospace & Defense ETF (BATS: ITA), the largest fund in the group, is higher by 21% year-to-date.
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). 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.
“The U.S. plans to increase combat operations in Afghanistan, while the battle against ISIS in Iraq and Syria continues. North Korea’s nuclear program has placed greater urgency on missile defense technology. Passenger jet manufacturers and their suppliers enjoy a long backlog of orders for new-generation planes,” reports Investor’s Business Daily.
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.
“Defense spending rarely drops, which is one reason iShares U.S. Aerospace & Defense has been a good long-term performer. The ETF’s only down year in the last 10 was 2008, while the financial crisis unfolded. The fund’s five-year total return is more than 20% and the 10-year return is about 11%, according to the iShares website,” according to Investor’s Business Daily.
Rivals to ITA 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.
“Commercial aviation has been a growth industry of its own, largely because many airlines have been busy ordering new jets with higher fuel efficiency and other operating advantages,” notes IBD.
For more information on the defense industry, visit our aerospace & defense category.