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Philip van Doorn

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June 12, 2019, 8:04 a.m. EDT

As United Technologies and Raytheon merge, here are the hottest defense-sector stocks

The aerospace and defense industry group has greatly outperformed the broader stock market this year and over longer periods

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By Philip van Doorn, MarketWatch


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United Technologies and Raytheon announced over the weekend that the two aerospace and defense contractors, valued at a combined $166 billion, would merge.

United Technologies and Raytheon announced a big M&A deal over the weekend. That makes this an opportune time for a review of the U.S. aerospace and defense sector.

United Technologies /zigman2/quotes/203237915/composite UTX -0.09%  will acquire Raytheon /zigman2/quotes/203226062/composite RTN -0.49%  in an all-stock deal. As of the market close June 7, the companies’ market valuation was a combined $166 billion. However, the deal values the merged company at $100 billion after planned spinoffs. This will create the second-largest U.S. aerospace-and-defense company after Boeing /zigman2/quotes/208579720/composite BA -0.51% when the merger is completed next year.

The following information is as of the close June 7. The UTX/Raytheon merger was announced June 9.

The S&P 500 Aerospace and Defense sector was up 23% for 2019 (with dividends reinvested), while the entire S&P 500 /zigman2/quotes/210599714/realtime SPX +0.0020%  was up 16%.

This chart compares five-year total returns (with dividends reinvested) for the S&P 500 Aerospace and Defense subsector with that of the entire index:


FactSet

Here’s one comparing 10-year returns:


FactSet

15-year returns:


FactSet

So the long-term story is a very good one. Commercial air travel remains a strong and growing industry, and its obvious that no matter which party has controlled Congress or the White House, the U.S. government is going to continue pouring vast sums into national defense.

Aerospace and Defense ETFs

Here are some examples of ETFs that track aerospace, defense and related companies broadly and without leverage, using different approaches.

The SPDR S&P Aerospace & Defense ETF /zigman2/quotes/203252291/composite XAR -0.46% tracks the equally weighted S&P Aerospace & Defense Select Industry Index, with annual expenses of 0.35% and a rating of five stars (the highest) from Morningstar. Perhaps the rating isn’t surprising, in light of the subsector’s outperformance. It held 31 stock as of the close June 7.

The iShares U.S. Aerospace & Defense ETF /zigman2/quotes/207320401/composite ITA -0.47%  is weighted by market capitalization. The fund’s annual expense ratio is 0.43% and it also has a five-star rating form Morningstar. It held 34 stocks as of the close June 7.

/zigman2/quotes/203237915/composite
US : U.S.: NYSE
$ 137.53
-0.13 -0.09%
Volume: 2.19M
Sept. 19, 2019 6:30p
P/E Ratio
22.44
Dividend Yield
2.14%
Market Cap
$118.79 billion
Rev. per Employee
$277,021
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/zigman2/quotes/203226062/composite
US : U.S.: NYSE
$ 199.33
-0.98 -0.49%
Volume: 1.04M
Sept. 19, 2019 6:30p
P/E Ratio
18.36
Dividend Yield
1.89%
Market Cap
$55.79 billion
Rev. per Employee
$403,851
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/zigman2/quotes/208579720/composite
US : U.S.: NYSE
$ 384.44
-1.97 -0.51%
Volume: 3.03M
Sept. 19, 2019 6:30p
P/E Ratio
45.02
Dividend Yield
2.14%
Market Cap
$217.44 billion
Rev. per Employee
$660,961
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/zigman2/quotes/210599714/realtime
US : S&P US
3,006.79
+0.06 +0.0020%
Volume: 1.55B
Sept. 19, 2019 5:17p
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/zigman2/quotes/203252291/composite
US : U.S.: NYSE Arca
$ 111.28
-0.51 -0.46%
Volume: 94,072
Sept. 19, 2019 8:00p
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/zigman2/quotes/207320401/composite
US : Cboe BZX US Equities Exchange
$ 230.03
-1.09 -0.47%
Volume: 102,571
Sept. 19, 2019 4:10p
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