The growth of the Aerospace and Defense industry is largely
determined by the spending policies of government departments,
with the U.S. defense budget being the key driver. As a result,
recent cut in U.S. defense spending has triggered serious
concerns over the future of the sector. (see
Defense ETF Investing 101
)
U.S. defense spending is being adversely affected by the
Budget Control Act of 2011
. The Act has two main parts that could impact future defense
spending. The first is a $487.0 billion reduction to the
previously planned defense spending for the next decade.
The second part is a sequester mechanism that would impose an
additional $500.0 billion cut on defense spending between 2013
and 2021, if the Congress is unable to approve a plan to reduce
the U.S. deficit by $1.2 trillion by March 2013..
Last month, the U.S. Senate unanimously approved
the 2013 budget of $633.3 billion, up $1.7 billion from the
request made
. Of this, the base budget is $544.9 billion and $88.5 billion is
allocated for overseas operations. The latest authorization that
extends U.S. sanctions on Iran and strikes restrictions on
biofuel was inevitably lower than the 2012 level of $645.7
billion.
However, the picture is not entirely gloomy. In wake of
defense budget cuts, the companies often fall back on joint
ventures, strategic alliances and big international orders to
pool their resources, allowing them access to new markets. (see
Can The Defense ETFs Soar Despite Headwinds?
)
Until recently, the Pentagon entered into a purchase agreement
with Lockheed Martin (LMT) for more jets, albeit at a lower
price. While Canada seems skeptical about proceeding with its
purchase plan of F-35 from Lockheed, Pentagon assured that it
will buy a fifth group of F-35 Joint Strike Fighter jets, a long
impending deal pertaining to the costliest weapons program in the
U.S. history.
The Pentagon is also expected to ink a deal with
Lockheed on the quicker funding for a sixth fleet of F-35s
. This could lessen Lockheed's liability from its earlier work on
the jets that was done without any contract.
Further, a number of new emerging markets as well as developed
nations, such as India, China, Japan, the United Arab Emirates,
Saudi Arabia, and Brazil are boosting their defense spending and
generating business for the U.S. However, China is ramping up its
military modernization by itself and is likely take the lead in
the east. (see
Get True Emerging Market Exposure With These
Three ETFs
)
In fact, as per Aerospace Industries Association (AAI), some
major activities currently in store for the U.S. defense sector
are foreign military sales, implementation of NextGen, export
control reform, extension of the R&D tax credit and progress
on NASA's human space exploration strategy. Its focus on joint
ventures, mergers and acquisitions is no less important.
Moderately strong long-term prospects make the Aerospace &
Defense fund attractive for investors willing to withstand the
near-term drag on the sector. Investors seeking exposure to the
U.S. aerospace & defense market may find
iShares Dow Jones US Aerospace & Defense ETF
(
ITA
),
PowerShares Aerospace & Defense ETF
(
PPA
) and
SPDR S&P Aerospace & Defense ETF
(
XAR
) interesting choices.
ITA tracks the Dow Jones U.S. Select Aerospace & Defense
Index. It has 34 holdings including stocks like United
Technologies Corporation (
UTX
), Boeing (
BA
) and Precision Castparts Corp. (
PCP
). The sector breakdown in this fund is 56% aerospace and 44%
defense. With total assets of about $78.9 million, ITA is the
largest product in this space (see
Zacks #1 Ranked Aerospace & Defense ETF in
Focus
). The product charges around 47 bps in annual fees.
With an AUM of $46.5 million, PPA tracks the SPADE Defense
Index. Boeing, Honeywell International Inc. (
HON
) and United Technologies are its top three holdings among a
total of 49. The sector breakdown for this fund is 81%
industrial, 15% information technology and 4% materials. While
this choice is an expensive one with around 66 bps of annual
fees, its daily trading volume of 13,371 is higher than two other
choices in this space. (see more in the
Zacks
ETF Center
)
With an AUM of $16.1 million, XAR tracks the S&P Aerospace
& Defense Select Industry Index and of its 35 holdings, the
top three stocks are B/E Aerospace, S Precision and Hexcel Corp.
Industrials account for 92.7% of holdings while technology makes
up 6.71%. The product charges 35 bps in annual fess and its total
daily volume is around 1,606 units.
As of September 30, 2012, ITA, PPA, XAR returned a respective
of 21.37%, 23.54% and 23.96% over the one-year period. At the
current level, it has been noticed that while defense spending
will slow down, most of these companies have significant growth
catalysts in the commercial aerospace business.
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 >>
(ITA): ETF Research Reports
(PPA): ETF Research Reports
(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