Hot Aerospace ETFs Waiting on Washington

The iShares U.S. Aerospace & Defense ETF (BATS: ITA), PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) and other aerospace and defense ETFs are among this year’s best-performing industry funds.

Aerospace and defense stocks and ETFs are now waiting on politics to play out, which is not surprising given the sensitivity of this group to federal budgets and spending.

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.

“Since the U.S. government’s fiscal 2018 began on Oct. 1 without a budget, the Department of Defense is operating under a continuing resolution that lasts until Dec. 8; this freezes funding at fiscal 2017 levels and prohibits new program starts,” said Morningstar in a note out Friday. “We think the most likely outcome is an extension of the continuing resolution into next calendar year, and we don’t think the U.S. defense stocks we cover will react to this development.”

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). PPA holds 50 stocks “involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations,” according to PowerShares.