Aerospace stocks and exchange traded funds are among the best-performing “Trump trades,” but investors should closely examine each ETF in this space before deciding which one best suits their individual investment objectives.
Aerospace and defense ETFs include 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 the biggest of the trio while XAR is a compelling option because it uses an equal-weight methodology, one of the oldest forms of smart beta indexing.
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.
“The request for increased defense spending comes as Trump works to fulfill his campaign promises of defeating ISIS and bolstering the strength of the military,” said State Street in a recent note. “Notably, this request preceded the first few major military operations of Trump’s presidential career: when he ordered a missile strike in early April on a Syrian air base believed to have been used to launch a chemical attack, dropped the ‘Mother of all Bombs’ on ISIS and conducted a bit of saber-rattling with North Korea.”
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.
“An industry approach is likely the most appropriate means of harnessing the benefits of a far-reaching defense-spending program like the one Trump has proposed. This is underscored by the fact that 97% of the companies in the S&P Aerospace & Defense Select Industry Index are contractors for the Department of Defense,” according to State Street.
The S&P Aerospace & Defense Select Industry Index is the equal-weight index XAR tracks. XAR is up 8.4% year-to-date and nearly 26% over the past year. The ETF resides just 2.2% below its record high. XAR holds 37 stocks with a weighted average market capitalization of $21.6 billion, according to issuer data. The ETF turns six years old in September and charges 0.35% per year.
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