CashNews.co
The aerospace and defense sector found its largest base in the U.S.
with a military budget fittingly impressive. Of late, investors may
rightly be worried about the fate of the defense industry in the
U.S. considering the sequestration and budget austerities that are
looming on the industry as a whole. (Read: 3 Hot Sector ETFs
for 2014)
Nevertheless, leading contactors have emerged relatively unscathed
so far, thanks to foreign contracts as well as small regular
defense contracts.
Growing commercial opportunities on the heels of an improving
global economy, a pick-up in defense spending in certain other
countries and technological innovations and acquisitions actually
made up for the military budget cuts. Meanwhile, from the civilian
side, the commercial aircraft fleet is also aging fast which is
spurring many airliners to upgrade their fleet.
In this perspective, amongst the big names, The Boeing
Co. (BA) remains prudent enough to not only maintain its
foothold in the commercial space, but also remains proactive in the
defense arena despite budget austerities. (Read: Follow Warren
Buffett in 2014 with these Sector ETFs)
ETFs to Tap the Sector
The aerospace and defense sector has been performing well over the
past three months, overcoming fears of government spending cuts and
sequestration. Exchange traded funds (ETFs) like SPDR
S&P Aerospace & Defense (XAR) and iShares
US Aerospace and Defense (ITA) have provided returns of
57.18% and 53.40%, respectively, in the year-to-date time frame.
Investors have been pouring money in these stocks and ETFs over the
past few months and the sector has significantly outperformed the
broader market this year.
Below, we highlight the ETFs in the aerospace and defense sector,
which primarily have a U.S. bias. Investing in these funds in
basket form greatly reduces the risk of investing in particular
stocks. Moreover, if one is interested in playing a sector, ETFs
have an edge because it comes in a packaged form that gives instant
access to a specific sector, the Aerospace & Defense sector in
this particular case. The aerospace and defense stocks have
performed well in the first nine months of the year and the
benefits of the same have trickled down to the defense ETFs (Read:
Play a Surging Defense Industry with These 3 ETFs).
SPDR S&P Aerospace & Defense ETF (XAR)
This fund follows the S&P Aerospace & Defense Select
Industry Index, focusing on the Aerospace and Defense sector of the
S&P Total Market Index. The Index is one of 19 S&P Select
Industry Indices, each designed to measure the performance of a
narrow sub-industry or group of sub-industries as defined by the
Global Industry Classification Standards.
With holdings of 34 stocks, the top spots are taken up by Spirit
AeroSystems Holdings Inc. Class A., Alliant Techsystems Inc. and
The Boeing Co. comprising 5.01%, 4.71% and 4.60%, respectively, of
total net assets.
Launched in September 2011, this index has a 99.48% focus on U.S
companies with the balance 0.52% on others.
The fund so far has managed assets of $33.7 million and has an
annual dividend yield of 1.63%. The top 10 companies hold a 44.04%
share of total net assets. The average daily volume is about 2,523
shares.
iShares U.S. Aerospace & Defense ETF (ITA)
ITA tracks the Dow Jones U.S. Aerospace & Defense Index,
providing exposure to companies related to the Aerospace and
Defense industry in the U.S. equity market. This index has a 99.86%
focus on U.S companies with the balance 0.14% on others. The fund
has an annual dividend yield of 1.61%.
The ETF launched in May 2006 presently has nearly $296.2 million in
AUM and average daily volume of 38,217 shares a day. This fund
holds 39 stocks and ITA is a concentrated choice with about 56.41%
invested in the top 10 holdings.
Among individual holdings, the top stocks in the ETF include The
Boeing Company, United Technologies Corp and Precision Castparts
Corp. comprising 9.87%, 8.70% and 6.33%, respectively, of total net
assets.
Aerospace & Defense Profile (PPA)
This ETF tracks the SPADE Defense Index, holding 51 securities in
its basket. The Index is designed to identify a group of companies
involved in the development, manufacturing, operations and support
of U.S. defense, homeland security and aerospace operations. The
index was launched in October 2005.
This index has a 99.84% focus on U.S companies with the balance
0.16% on others. The fund so far has managed assets of $89.3
million. The top 10 companies hold a 53.01% share of total net
assets. The average daily volume is about 33,519 shares and the
fund has an annual dividend yield of 1.19%.
In terms of holdings, The Boeing Company, Lockheed Martin Corp. and
Honeywell International Inc. occupy the top three positions in the
basket comprising 6.82%, 6.56% and 6.13%, respectively, of total
net assets.
To Sum Up
The aerospace & defense sector has been a keystone of the U.S.
economy for decades and has provided well paying jobs for a variety
of skill levels. However, the sector’s position is now challenged
by global competition, changes in technology, national and
worldwide economic conditions, and global policies affecting
defense, civilian and commercial aviation.
Sequestration still remains an overhang both in the civil and
military sectors. The companies that have little diversification
outside the U.S. are highly susceptible to spending cuts from
sequestration. Recently, the House and Senate negotiators have
reached a two-year budget agreement, mitigating about half the
sequester cuts expected to gouge the defense budget in fiscal year
2014. Upon successful approval from both the House and Senate, any
near-term government shutdown will be averted.
Nonetheless, undeterred by defense budget cuts, the big defense
operators are expanding their operations through acquisitions.
Moreover, in order to counter the domestic headwinds, these players
are looking for growth from international orders and are busy
restructuring their businesses. Also, they are keeping themselves
abreast in the technological front with new products countering
fresh competition.
To conclude, the sector definitely enjoyed a solid earnings season,
technological progress, acquisition benefits and cost-cutting
efforts from individual companies. But these positives are held in
balance by defense budget austerities. This keeps us Neutral on the
sector for the time being.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30
Days. Click to get this free report >>
ISHARS-US AEROS (ITA): ETF Research Reports
PWRSH-AERO&DEF (PPA): ETF Research Reports
SPDR-SP AER&DEF (XAR): ETF Research Reports
To read this article on Zacks.com click here.
Zacks Investment Research
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days. Click
to get this free report
SPDR S&P Aerospace and D… (AMEX:XAR)
Asset Historical Chart
From Jul 2024 to Aug 2024
SPDR S&P Aerospace and D… (AMEX:XAR)
Asset Historical Chart
From Aug 2023 to Aug 2024