Abundant Tailwinds for Aerospace ETFs | ETF Trends

It’s been nearly two years since Russia invaded Ukraine. And as recent headlines confirm, the Middle East is once again a hotspot of geopolitical tensions. Ominous events to be sure. But those goings-on have also presented investors with opportunities in aerospace and defense stocks and the related ETFs. The Invesco Aerospace & Defense ETF (PPA) proves as much. PPA, which tracks the SPADE™ Defense Index, has been an impressive performer over the past 24 months.

During that span, the Invesco ETF surged 32.7%, or nearly triple the S&P 500’s performance over the same timeframe. Obviously, a more apples-to-apples comparison is to measure PPA against equivalent ETFs and the broader industrial. For the two years ending  February 6, PPA trounced the largest aerospace ETF by 960 basis points while almost doubling the 16.8% returned by the S&P 500 Industrials Index over that period.

That two-year period has included the U.S. shipping substantial amounts of weaponry and other forms of military aid to Ukraine, indicating some PPA member firms are benefiting from unfortunate geopolitical circumstances.

Good Time to Consider PPA

There are other factors to consider with PPA, some of which are favorable. The ETF allocates nearly 5% of its weight to Boeing (NYSE: BA), which is being plagued by safety issues about the 737 Max commercial aircraft. But four other stocks, three of which are more defense-heavy, command larger weights in the ETF’s portfolio.

Some other PPA member firms are suppliers of parts for commercial jets. Those companies could benefit at a time of renewed emphasis on passenger air travel safety.

Then there is PPA leverage to a potential rebound by smaller stocks. Aerospace/defense is often viewed as an industry dominated by large-cap corporations. But such firms account for just half of PPA’s roster. That says if mid- and small-cap equities rebound, PPA could participate in the rally.

While this is the least fundamentally driven catalyst, it’s also worth noting that some PPA components, including Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC), often rank among the best-performing S&P 500 stocks in February.

“Per data from Schaeffer’s Senior Quantitative Analyst Rocky White, four defense stocks landed on the table of best-performing February stocks on the S&P 500 Index (SPX) in the last 10 years. NOC and LMT average respective February returns of 4.3% and 3.1%, with positive returns 90% and 80% of the time,” according to Schaeffer’s Investment Research.

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