The Industrial Select Sector SPDR (NYSEArca: XLI), the largest exchange traded fund tracking industrial stocks, is up nearly 6.6% to start 2018. Aggressive traders looking for a little more industrial excitement can consider the Direxion Daily Industrials Bull 3X Shares (NYSEARCA: DUSL).

The Direxion Daily Industrials Bull 3X Shares tries to deliver triple the daily returns of the S&P Industrial Select Sector Index, the same benchmark XLI tracks. Aerospace and defense names remain a source of strength for diversified industrial ETFs.

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. Increased infrastructure spending is also seen as a catalyst for industrial stocks and ETFs.

“But looking ahead to 2018, the industry is facing some potential headwinds worth keeping an eye on.  Namely, the risk of fewer government contracts and less public spending,” said Direxion in a recent note. “While infrastructure and defense companies both once seemed like mortal locks to get funding from a ‘pro-growth’ government led by an administration that campaigned on a “historic” $1 trillion infrastructure plan, that now seems a little less likely now.”

In addition to political rhetoric, 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.

“Couple the shrinking budget for massive infrastructure with a Congress that has struggled trying to pass major legislation of any kind and you might see why the engines of industry might be better off shifting into low gear over the next few months or risk stalling in hopes of badly needed public works contracts,” said Direxion. “While military spending might seem to be on pace for further growth, the federal budget is a bipartisan dance, and Democrats can also play the deficit game.”

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.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.