The defense sector has held up this year, overcoming the fears
of sequestration and spending cuts to big-ticket programs that
are expected to hurt the performances of the industry behemoths.
In fact, the sector has easily outpaced the broad S&P 500
index over the trailing three months by wide margins.
The sequester, which was put into effect in March 2013, has
resulted in broad budget cuts. Generally, spending on nearly
every U.S. defense budget item has been lowered by 10%. The
impact of budget sequestration proved less-than-feared, thereby
leading to a rally in the defense and aerospace securities across
the board (read:
2 Sector ETFs Surging This Earnings Season
This is largely thanks to technological innovation, big
contracts, international orders, acquisitions, and growing
commercial demand. Further, a pickup in defense spending in a
number of new emerging markets as well as developed nations such
as India, Japan, the United Arab Emirates, Saudi Arabia and
Brazil have opened doors to the U.S. aerospace and defense
Strategic alliances with other foreign nations often entail
the U.S. to share its military technology and supply weapons to
its allies, which in turn boost the sector's revenues.
The bullish trend in the aerospace & defense space is
expected to continue to close out the year on the back of solid
earnings by top players (read:
Winning ETF Strategies for the Second Half
). The industry giants - Boeing (
), Lockheed Martin (
), United Technologies (
), Northrop Grumman (
), Honeywell International (
) and General Dynamics (
) -reported better-than-expected results this earnings
Further, earnings estimate revision ratios for these firms
have been among the highest in the S&P 500 for both 2013 and
2014, suggesting a bright outlook for the space. The rise in
commercial orders will also help to counter government issues
should those start to plague the sector.
How to Play
Considering broad opportunities as well as remarkable earnings
by defense giants, investors seeking to play the defense market
could consider the following
for broad exposure to the space:
iShares Dow Jones U.S. Aerospace & Defense Index
This fund follows the Dow Jones U.S. Select Aerospace &
Defense Index, giving investors exposure to the broad aerospace
and defense industry. With holdings of 35 stocks, the fund
allocates higher weights to the top two firms - UTX and BA - at
9.46% and 8.33%, respectively. Other securities hold less than
6.12% of total assets each.
From a sector perspective, aerospace has been the top priority
representing 55.5% of ITA while defense takes the remainder of
the basket. The fund has accumulated $115.4 million in AUM while
charging 46 bps in fees a year. Volume is light, probably
increasing the total cost for the fund.
The ETF is up over 11.5% in the trailing three month period
and over 28.4% so far this year. The fund currently has a Zacks
ETF Rank of 1 or 'Strong Buy' with 'Low' risk outlook (read:
3 Hot Sector ETFs Surging to #1 Ranks
). This suggests that the product is expected to outperform its
peers over the next one year.
PowerShares Aerospace & Defense Portfolio
This ETF tracks the SPADE Defense Index, holding 48 securities
in its basket. The fund so far has managed assets of $61.3
million while average daily volume is light, suggesting
additional cost in the form of wide bid/ask spread beyond the
expense ratio of 0.66% per year.
In terms of holdings, UTX, LMT and HON occupy the top three
positions in the basket with at least 6% share each. Though the
aerospace and defense sector takes nearly 81% share, information
technology and materials also have a decent exposure in the
Time for This Top Ranked Defense ETF?
PPA returned over 10.3% in the trailing three-month period and
added nearly 26.4% in the year-to-date timeframe. The ETF has a
Zacks Rank of 2 or 'Buy' with 'Low' risk outlook.
SPDR S&P Aerospace & Defense ETF (
This fund seeks to invest its total asset base of $20.9
million in 36 stocks by tracking the S&P Aerospace &
Defense Select Industry Index. The ETF charges 0.35% in fees and
expenses while trades in paltry volume on a daily basis.
The product follows equal allocation strategy that prevents
heavy concentration and suggests higher diversification benefits.
Spirit AeroSystems Holdings (
), Alliant Techsystems (
) and UTX are the top three spots in the fund's portfolio (see
more in the
In terms of performance, the ETF surged nearly 11.6% over the
past three months and 28.6% year-to-date. XAR currently has a
Zacks ETF Rank of 1 or 'Strong Buy' with 'Low' risk outlook.
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BOEING CO (BA): Free Stock Analysis Report
GENL DYNAMICS (GD): Free Stock Analysis
ISHARS-US AEROS (ITA): ETF Research Reports
LOCKHEED MARTIN (LMT): Free Stock Analysis
PWRSH-AERO&DEF (PPA): ETF Research
UTD TECHS CORP (UTX): Free Stock Analysis
SPDR-SP AER&DEF (XAR): ETF Research
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