Second quarter earnings season has remained rather lackluster
so far. As of the end of last week, 62 S&P 500 companies,
accounting for 59.3% of the index's total market capitalization,
have already reported.
Most of the earnings growth of the S&P 500 has been driven
by the Finance sector results, which have been quiet strong
though the 'quality' of earnings is not great.
Aerospace & Defense, a relatively smaller sector with the
S&P 500, has delivered solid results this quarter and is
current experiencing positive earnings revisions trend-with
rising revision ratios for 2013 and 2014, per
Zacks Earnings Preview
A positive earnings revisions trend has sent the industry to
#4 (out of 62) on Zacks 'M' industry rank list as of July 27,
2013. The Zacks Industry Rank relies on the same estimate
revisions methodology that drives the Zacks Rank for stocks.
3 Hot Sector ETFs surging to #1 Ranks
The impact of sequester on these companies has not been as bad
as earlier feared, and international orders have been on solid
growth. Further, commercial aerospace orders have been rising. As
a result, investors have been pouring money in these stocks and
over the past few months and the sector has significantly
outperformed the broader market this year.
Excellent Quarterly Results
Some of the dominant players in the industry have reported
solid second quarter results. (Read:
3 Bank ETFs leading the pack this earnings
Boeing (BA) raised its guidance based on higher expected
volume as commercial deliveries remained strong and foreign sales
of military aircraft were rising. At the same time, Boeing's
management expressed concern that most of the impact of
sequestration was yet to be seen.
The company spent $1 billion on share buybacks last quarter
and with $14 billion in cash and marketable securities as of the
end of the second quarter on its balance sheet, the buyback
activity is expected to continue in the coming months.
United Technologies (UTX) missed on the top-line but raised
the low-end of its 2013 earnings guidance. During the earnings
conference call the CFO said "we continue to see strong growth in
the commercial aviation industry…. While we continue to see
pressure in the military…the overall aerospace industry remains
Lockheed Martin (LMT) also beat the earnings consensus
estimate and raised their revenue and earnings guidance for the
Northrop Grumman (NOC) beat Zacks consensus estimate for
earnings as well as revenue and improved their guidance.
ETFs to play this sector
Below we have analyzed three ETFs available to investors to
play this sector.
PowerShares Aerospace & Defense Portfolio (
PPA is based on the SPADE Defense Index that tracks companies
involved in the development, manufacturing, operations and
support of US defense, homeland security and aerospace
operations. It is the oldest product in the space PPA with
an inception date of October 26, 2005.
Per sponsor's website, sector allocations as of July 26, 2013
were Industrials (81%), Information Technology (16%) and
The product has managed to garner $61.3 million in assets so
far, which are currently invested in 48 securities. It charges 66
basis points in expenses and pays out dividends at an attractive
yield of 2.1%.
PPA is a Zacks Rank#2 (Buy) ETF.
iShares U.S. Aerospace & Defense ETF (
ITA which made it debut in May 2006 is currently the largest
ETF in the space with $115.4 million in assets. It charges annual
fee of 47 basis points per year while the dividend yield is
pretty nice at 1.8% urgently.
The fund holds 35 securities in its basket with United
Technologies (9.5%), Boeing (8.3%), Precision Castparts (6.1%)
and Lockheed Martin (6.1%) being the top holdings.
Aerospace takes about 55% of the asset base while Defense
accounts for the rest 45%.
ITA is a Zacks Rank#1 (Strong Buy) ETF.
SPDR S&P Aerospace & Defense ETF (
Launched in September 2011, this product tracks S&P
Aerospace and Defense Select Industry index, which is a modified
equal weight index.
This product has attracted AUM of $20.86 M so far. It holds 36
securities with weighted average market cap of $19.7 billion. It
charges 35 basis points in expenses and has a decent dividend
yield of 1.31% currently.
Spirit AeroSystems Holdings, Alliant Techsystems, United
Technologies and Lockheed Martin are the top holdings but being
modified equal weighted, the fund is pretty well diversifies with
these top holdings accounting for just 18.3% of the asset
XAR is a Zacks Rank#1 (Strong Buy) ETF.
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ISHARS-US AEROS (ITA): ETF Research Reports
PWRSH-AERO&DEF (PPA): ETF Research
SPDR-SP AER&DEF (XAR): ETF Research
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