ETF Spotlight: Aerospace and Defense

ETFtrends.com
August 28, 2013

Commercial aerospace is back on the radar as global air traffic trends are looking positive. S&P Capital IQ has a positive fundamental outlook on the industry and focused exchange traded funds remain one of the best plays on the sector.

Of course, the defense sector is also in focus on reports the U.S. is readying an air strike against Syria.

“We believe the underlying drivers of the commercial aerospace industry, improving global economic growth, an emerging global middle class, persistently high energy prices and an aging fleet of commercial aircraft, combined with recovering aftermarket growth, will provide lift to these stocks on the back of potentially record 2013 new aircraft orders and strengthening earnings growth,” S&P Capital wrote in a recent note. [Aerospace & Defense: What Sequester?]

Global growth and economic trends generally dominate the sector, guiding focused stocks and funds such as the PowerShares Aerospace and Defense Portfolio (PPA) . The IATA forecast recently upgraded the global airline profitability forecast to $12.7 billion, up from a previous $7.6 billion last year. [Aerospace and Defense ETFs Face Debt Ceiling,  Spending Cuts]

Over the past several years, the commercial aviation industry was punished by higher fuel prices, spending cutbacks on upgrades and maintenance and lower overall capacity during the economic downturn. The picture is beginning to change due to features such as:

  • Renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler.
  • International Air Transportation Association (IATA) forecasts
  • 2013 global revenue passenger kilometers (an industry demand metric) will grow 5.3%, versus 4.8% year-to-date through June. The trend is solid for 2014 as well.
  • New aircraft trends remain solid, such as more profitability, new aircraft program launches and continued demand for aircraft models and technology such as the improved Boeing (BA) Airbus. [ETF Spotlight:  Aerospace and Defense]

ETFs that tack the aerospace and defense landscape, including the commercial aerospace sub-sector include iShares US Aerospace & Defense ETF (ITA) rated “Overweight” by S&P Capital, and the SPDR S&P Aerospace & Defense ETF (XAR) , rated “Marketweight”.

Tisha Guerrero contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.