Trump Policies and North Korea Aid Aerospace & Defense ETFs

Trump’s budgetary amendments in the U.S. legislation, along with a handful of defense-related policies that he has adopted, have been boosting the U.S. Aerospace and Defense industry. To this end, the recently passed National Defense Authorization Act (NDAA), better known as the fiscal 2018 defense policy bill, hold a lot of significance.

Worth roughly $700 billion, this bill extensively surpassed President Trump’s budget request. It authorized an additional $8.5 billion for the Missile Defense Agency to strengthen homeland, regional and space missile defense, which is $630 million higher than the Trump administration's request. (Read: Should You Buy Retail ETFs Now?)

On top of that, the frequent wave of missile testing from North Korea, escalating United Nation sanctions placed on the regime and President Donald Trump’s unrelenting war of words against Pyongyang is another vital reason why U.S. defense contractors have surged multiple times in the recent past.

Other Factors Influencing the Industry

In addition, Trump’s new defense strategy for Afghanistan, recent cyber security threats that affected nations worldwide as well as sporadic attacks on European nations continued to boost U.S. Defense stocks.

Another factor driving this industry is the rise in defense spending by other major regional powers such as Japan, China and India. (Read: Tech ETFs and Stocks Tumble: Is it a Solid Entry Point?)

Coming to earnings performance, the broader Aerospace sector held up well in the third quarter. The earnings beat ratio for 90% of the stocks in this space (percentage of companies coming up with positive surprises) was an impressive 77.8%, while the revenue beat ratio was 33.3%.

Further, new macro challenges along with rising completion are prompting aerospace and defense industry players to revisit their business models as well as expand their core operations and product lines. One such example is the deal that United Technologies Corp. (UTX) entered into this September, to take over Rockwell Collins, Inc. (COL) for $30 billion. In the same month, Northrop Grumman agreed to buy rocket-maker Orbital ATK, Inc. (OA), for $9.2 billion. Both these deals will give birth to two defense giants with enhanced product portfolio.

However, questions are still being raised on the stability of the high spending promises made by Trump for defense. Then again, while the America First Budget proposed a 10% hike in defense spending, to avoid any further budget deficit, it includes a simultaneous decline in spending in non-defense programs, particularly protection agency (EPA). After all, stability in the economy is not guaranteed only by the departments of justice, defense and homeland security.

Then there remains workforce issues since the industry is facing retirements, a relatively high attrition rate among new employees and a greater proportion of older workers. Also, shortage of trained technical graduates is on the rise. This in turn may impact the industry’s production level.

Nevertheless, there’s no denying the fact, that amidst such headwinds, the U.S. Aerospace & Defense industry has been delivering since Trump won the election. (Read: Best ETFs and Stocks from November’s Top Sector)

ETFs allow investors to benefit from risky instruments in a relatively safer way.

Given the solid growth prospects of the U.S. Defense contractors, the time is ripe to focus on Aerospace & Defense ETFs that cash in on the benefits of individual defense stocks and pass them on to investors.

Defense ETFs to Keep in Focus

Aerospace & Defense ETFs are safe havens by virtue of the ever-expanding demand that the industry has been witnessing for its defense equipment (see all Aerospace & Defense ETFs here). Below we have focused on ETFs with holdings from the U.S. Aerospace & Defense industry.

IShares U.S. Aerospace & Defense ETF (ITA)

ITA is one of the most popular and widely traded Aerospace & Defense ETFs. The main purpose of the fund is to track the investment results of the Dow Jones U.S. Select Aerospace & Defense Index composed of U.S. equities in the aerospace and defense industry. The underlying index measures the performance of the aerospace and defense sector of the U.S. equity market. This fund has returned 29.72% in the last 12 months.

The fund has an asset base of nearly $4.67 billion. It holds 39 stocks and the top 10 companies occupy a 58.19% share of total assets. It has an average daily volume (3 months) of 297,508 shares. The fund has a dividend yield of 1.08% and an expense ratio of 0.44%.

The top three holdings in the ETF are The Boeing Company (BA), United Technologies Corp. (UTX) and Lockheed Martin Corp. (LMT) with an asset allocation of 10.55%, 7.97% and 7.42%, respectively.

ITA sports a Zacks ETF Rank #2 (Buy).

PowerShares Aerospace & Defense Portfolio ETF (PPA)

PPA is based on the SPADE Defense Index, a market-cap weighted index that tracks companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations. It is the oldest product in the space. This fund has returned 26.99% in the last 12 months.

The fund has an asset base of nearly $821.4 million. It holds 54 stocks and the top 10 companies occupy a 56.97% share of total assets. It has an average daily volume (three months) of 83,494 shares. The fund has a dividend yield of 1.20% and an expense ratio of 0.61%.

The top three holdings in the ETF are Honeywell International Inc (HON), Boeing and United Technologies with asset allocation of 7.05%, 6.99% and 6.91%, respectively.

PPA carries a Zacks ETF Rank #2.

SPDR S&P Aerospace & Defense ETF (XAR)

 

The main purpose of XAR is to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P Aerospace & Defense Select Industry Index. The index represents the aerospace and defense segment of the S&P Total Market Index. This fund has returned 28.12% in the last 12 months.

The fund has an asset base of nearly $985.4 million. It holds 36 stocks and the top 10 companies occupy a 41.39% share of total assets. It has an average daily volume (3 months) of 144,418 shares. The fund has a dividend yield of 1.12% and an expense ratio of 0.35%.

The top three holdings in the ETF are Orbital ATK Inc., Teledyne Technologies Inc and KLX Inc. with asset allocation of 4.47%, 4.33% and 4.28%, respectively.

XAR is Zacks Ranked #1 (Strong Buy)

To Sum Up

The U.S. market is showing signs of regained strength courtesy of the new administration. In particular, the Aerospace & Defense industry has exhibited solid returns year to date, amid headwinds like workforce challenges and building up of arsenal in nations like Russia.

Notably, the S&P Aerospace & Defense Select Industry Index is up 26.7% year to date compared with the 15.33% increase for the S&P 500.

Therefore, tapping into the returns of the best defense contractors could be a wise investment decision as all the Aerospace & Defense ETFs mentioned above have returned over 25% in the last 12 months.

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ISHARS-US AEROS (ITA): ETF Research Reports
 
PWRSH-AERO&DEF (PPA): ETF Research Reports
 
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