Looking ahead, the aerospace and defense sector may have more room to fly. Increasing geopolitical tensions that fuel the news cycle around the Mideast, North Korea and Russia could continue to support defense spending. The budget is expanding over the next few years after the recent contraction.
The sector also looks attractive on a technical basis.
The positive outlook could drive “total return of ~12%, consisting of ~10% annual EPS growth and ~2% dividend yields, which should sustain relative valuations,” according to a recent Morgan Stanley note.
Potential investors interested in the aerospace and defense segment have a few ETF options to choose from, including the iShares U.S. Aerospace & Defense ETF (NYSEArca: ITA), PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) and the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR).
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). 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.
Additionally, the recently launched Direxion Daily Aerospace & Defense Bull 3x Shares (NYSEArca: DFEN) has experienced some rising demand among the trading community as a way to play the heightened tensions. DFEN, which was launched in May 2017, has $13.0 million in assets under management, and the ETF was trading at 77,000 shares Thursday, compared to its average daily volume of around 19,000 shares, according to Morningstar data.