When geopolitical headwinds howl, particularly those flowing from the Middle East, it's reasonable to expect that among the various sectors and industries, energy stocks will be affected. Next on that list is aerospace and defense equities and exchange traded funds.
That much was confirmed Monday when the three aerospace and defense ETFs to be mentioned here each hit all-time highs with the “worst” performer of the group rising “just” 1.01%. This was happening on a down day for the broader market and those three funds represented three of just eight ETFs that hit record highs on Monday.
Due to the volatility inherent in the oil patch, conservative investors looking for tactical positions tied to new geopolitical tensions may be better off considering one of the following aerospace ETFs.
The iShares U.S. Aerospace & Defense ETF (cboe:ITA) is the largest aerospace and defense ETF and tracks the Dow Jones U.S. Select Aerospace & Defense Index. ITA is on a remarkable run that has seen the fund surge nearly 33% this year.
In any environment, that's an impressive data point, but ITA's 2019 performance is all the more excellent when accounting for its 22.36% weight to Dow component Boeing /zigman2/quotes/208579720/composite BA -2.65% , which has had its share of struggles related to the 737 MAX passenger jet. Fellow Dow member United Technologies , 15.73% of ITA's roster, has also been in the limelight for its controversial purposed acquisition of Raytheon .
Still, ITA is soaring and there's still a lot to like with Boeing stock.
Boeing’s “budding services business will boost operating income in coming years, as the company aims for $50 billion in annual revenue from this segment,” said Morningstar in a recent note. “We assume that coordinating with suppliers when vertically integrating its supply chain, and introducing the new 777X in 2020, while also attempting matching demand through production increases will be Boeing’s biggest challenges.”
The perfect antidote to cap-weighted aerospace ETFs that are usually heavy on the aforementioned stocks, the equal-weight SPDR S&P Aerospace & Defense ETF /zigman2/quotes/203252291/composite XAR -0.20% is on a stellar pace of its own this year, up almost 42%.
XAR holds 29 stocks with a weighted average market value of $31.83 billion and due to its equal-weight methodology, the fund is actually more exposed to the defense side of the aerospace and defense equation rather than the passenger jet component of this investment thesis. That's a positive trait if Middle East tensions remain hot.
The Invesco Aerospace & Defense ETF /zigman2/quotes/202989564/composite PPA -0.92% is the oft-overlooked member of the aerospace and defense ETF trio, but it certainly deserves more love. With its 1% gain on Monday, PPA is higher by 39.62% year-to-date.
PPA follows the SPADE Defense Index. That benchmark is “designed to identify a group of companies involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations,” according to Invesco.
Home to 48 stocks, PPA is the largest of the ETFs highlighted here in terms of number of holdings.
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