The aerospace and defense sector found its largest base in the
U.S. with a military budget fittingly impressive. The country's
global leadership position requires it to maintain the capacity
to respond to the ever-changing national security
In April 2013, the Obama administration proposed a defense
budget of $526.6 billion for FY14, down $0.9 billion from the
FY13 annualized continuing resolution level of $527.5
The budget sequester that went into effect at the start of
March 2013 and that has a direct bearing on the U.S. government's
defense spending is a function of the country's fiscal and
economic challenges. Sequestration will cut some $1 trillion from
the defense budget over the next decade, according to The
Washington Free Beacon. Yet, the aerospace and defense industry
is holding up well this year thanks to technological innovations,
big contracts, acquisitions and growing commercial demand. (Read:
Silver ETFs Surge on Solid Industrial Demand
ETF 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 iShares US Aerospace
and Defense (ITA) and PowerShares Aerospace and Defense ("PPA")
have provided returns of 10.18% and 8.91%, respectively, over the
last 13 weeks (Read:
3 Aerospace & Defense ETFs Defying
). 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 half of the year
and the benefits of the same have trickled down to the defense
Play a Surging Defense Industry with These 3
iShares U.S. Aerospace & Defense ETF (
ITA tracks the Dow Jones U.S. Aerospace & Defense Index,
providing exposure to companies related to the Aerospace and
Defense industry. This index has 99.86% focus on U.S companies
with the balance 0.14% on others. The index measures the
performance of the aerospace and defense sector of the U.S.
The ETF launched in May 2006 presently has an asset base of
$150 million. This fund holds 35 stocks and the top 10 companies
hold a 56.29% share of total net assets.
The average daily volume is about 27,000 shares and the fund
has an annual dividend yield of 1.11%.
Among individual holdings, top stocks in the ETF include
United Technologies Corp., The Boeing Company and Precision
Castparts Corp. comprising 9.09%, 8.67% and 6.48%, respectively,
of total net assets.
Aerospace & Defense Profile (
This ETF tracks the SPADE Defense Index, holding 49 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 99.84% focus on U.S companies with the balance
0.16% on others. The fund so far has managed assets of $67
million. The top 10 companies hold a 53.01% share of total net
assets. The average daily volume is about 32,234 shares and the
fund has an annual dividend yield of 1.19%.
In terms of holdings, The Boeing Company, Honeywell
International Inc. and United Technologies Corp. occupy the top
three positions in the basket comprising 6.46%, 6.39% and 6.27%,
respectively, of total net assets.
SPDR S&P Aerospace & Defense ETF (
This fund follows the S&P Aerospace & Defense Select
Industry Index. The Index represents 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 35 stocks, top stocks in the ETF include
TransDigm Group Inc., Alliant Techsystems Inc. and Precision
Castparts Corp. comprising 4.53%, 4.45% and 4.41%, respectively,
of total net assets.
Launched in September 2011, this index has 99.48% focus on U.S
companies with the balance 0.52% on others.
The fund so far has managed assets of $20.7 million and the
fund has an annual dividend yield of 1.51%. The top 10 companies
hold a 43.78% share of total net assets. The average daily volume
is about 2,617 shares.
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
However, 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.
Keeping in mind the technological progress, acquisition
benefits and cost-cutting efforts of individual companies, we
have an overall bullish outlook for the sector.
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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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