Too-Big-To-Fail Programs Help Aerospace ETFs Fly

ETF Trends

Despite federal budget cuts, large U.S. defense companies saw continued growth, providing the wind beneath aerospace and defense sector exchange traded funds’ wings.

The iShares U.S. Aerospace & Defense ETF (ITA) rose 4.0% over the past week and is up 3.4% year-to-date.

As the government’s budget shrunk 11% in the fiscal year ended September 30, large contractors, like Lochkeed Martin (LMT) and Hungtington Ingalls Industries (HII), expanded on large, protected defense programs, reports Kathleen Miller for Bloomberg.

“These are almost too-big-to-fail programs,” Duncan Amos, an analyst with Bloomberg Government, said in a recent study. “They involve a lot of companies and a lot of employment, so no one wants them to go away. They are also the future of our Defense Department.”

Additionally, Boeing Co (BA) and Northrop Grumman Corp (NOC) maintained their share obligations, even with the budget reductions forced agencies to make cuts.

According to the Bloomberg Government study, aircraft and medical supplies were the only categories of 20 reviewed to see an increase in contract dollars over 2013.

“It’s guns or it’s grandmas,” Bloomberg Industries analyst Brian Friel, a review co-author, said in the article. “Much of the increased spending on health care is tied to the military or veterans.”

Lockheed saw first quarter profits surge 23%, beating analysts’ estimates, reports Jonathan D. Salant in a separate Bloomberg article. The company’s F-35 jet fighter program accounted for 16% of company sales in 2013.

ITA holdings include BA 9.0%, LMT 6.4%, NOC 5.0% and HII 2.4%.

Alternatively, investors can take a look at  PowerShares Aerospace and Defense Portfolio (PPA) , which is slightly less top heavy. PPA holdings include BA 6.6%, LMT 6.5%, NOC 4.5% and HII 1.9%. The ETF is up 4.4% year-to-date.

Additionally, the SPDR S&P Aerospace & Defense ETF (XAR) takes a more equal weight approach. BA is 3.7% of XAR, LMT is 3.5%, NOC is 3.6% and HII is 3.6%. The fund is up 2.5% year-to-date.

iShares U.S. Aerospace & Defense ETF

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For more information on the defense sector, visit our aerospace & defense category.


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