Thanks to technological innovations and growing commercial and
military demand, the global aerospace and defense industry has
held up nicely this year. However there are concerns that the
biggest consumer of defense equipment, the U.S. government, might
cut their defense spending in the near future, potentially
derailing growth in this corner of the market going forward.
This trend is further spread out across the globe in a number
of other key markets such as United Kingdom, France, Germany and
Spain. However, the investors focus more on the trend in the
U.S.-- the dominant player in this market, with nearly half of
total military spending in the world, easily outpacing the next
five biggest spenders combined (read:
Can The Defense ETFs Soar Despite Headwinds?
).
The U.S. military is facing possible cuts of $500 billion over
the next decade (2012-2021), including $55 billion for 2013, if
the Congress fails to find ways to reduce $1.2 trillion of fiscal
deficits before the end of December.
In this difficult scenario of tight budgets and cuts to big
programs, acquisitions offer big defense companies a way out to
bolster their financial positions. Strategic alliances among
companies have also been on the rise. The defense operators at
times join forces with each other, bring along their individual
expertise on the table and work as a cohesive unit for big
defense deals.
Additionally, big international orders will also add to the
growth of the aerospace and defense companies especially when the
U.S. government is taking proactive steps to trim the defense
budget. 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 defense spending.
(read:
Get True Emerging Market Exposure With These
Three ETFs
) Moreover, increasing awareness of cyber threats could open up
new markets for the defense majors despite lower demand for big
ticket items like jets and tanks.
Considering the broad issues and opportunities, many aerospace
and defense companies are holding up steady and, hence, investors
could benefit from these positive market trends. A look at some
of the top ranked ETFs in the space, with a lower level of risk,
could be a good idea (see more ETFs in the
Zacks
ETF Center
)
.
About the Zacks ETF Rank
A look at top ranked Aerospace & Defense ETFs can be done
by using the Zacks ETF Rank. This technique provides a
recommendation for the ETF in the context of our outlook of the
underlying industry, sector, style box, or asset class. Our
proprietary methodology also takes into account the risk
preferences of investors as well.
The aim of our models is to select the best ETFs within each
risk category. We assign each ETF one of five ranks within each
risk bucket. Thus, Zacks Rank reflects the expected return of an
ETF relative to other ETFs with a similar level of risk.
Using this strategy, we have found one ETF in the space that
has a Zacks Rank # 1 (Strong Buy) with a 'low risk' tolerant
level. The details are highlighted below:
iShares Dow Jones U.S. Aerospace & Defense Index
Fund (
ITA
)
Investors seeking exposure to the U.S. aerospace & defense
market may find ITA an intriguing choice. Launched in May 2006,
this fund has emerged as a strong winner in the entire aerospace
and defense space, producing more than 39% in returns over the
past three years. The fund seeks to replicate the price and yield
of the Dow Jones U.S. Select Aerospace & Defense Index,
before fees and expense.
With holdings of 35 stocks, the product consists of
manufacturers, assemblers and distributors of aircraft and
aircraft parts in the aerospace industry as well as producers of
components and equipment for the defense industry, such as
military aircraft, radar equipment and weapons (read:
Defense ETF Investing 101
).
The fund does an average job in spreading assets across
individual securities, as it puts about 55.2% of the assets in
the top 10 firms. United Technologies (
UTX
), Boeing Co. (
BA
) and Lockheed Martin (
LMT
) make up for more than 22% of the combined share in the basket.
While the product is tilted towards the large caps with about 45%
of the exposure, mid and small caps take up the remaining portion
of ITA. As a result, the fund tends to be less volatile than many
other products in the space.
From a sector perspective, aerospace has been the top priority
of the fund representing 54% of the total assets, followed by
defense with a 46% share. The product so far has managed assets
of $88.3 million and has a mixed style box including growth,
value and blend securities with a lower portfolio turnover of
16.0%.
The fund trades in a small volume of roughly 7,000 shares per
day, suggesting a wide bid/ask spread beyond the expense ratio of
0.47% per year. Despite its illiquid nature, the product is
often considered a high momentum (the change in the fund's price
over the past three months) ETF with value closer to 104,
suggesting that it will continue to move higher relative to its
counterparts (read:
Do You Need a High Momentum ETF?
).
The ETF has delivered impressive returns of about 7.2%
year-to-date (as of October 10) and yields 1.30% annually. Thus
the fund is a decent play on the space with a lower level of
risk.
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ISHARS-DJ AEROS (ITA): ETF Research Reports
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