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How a New Look House Could Affect Defense ETFs

This article was originally published on ETFTrends.com.

Democrats gained control of the House of Representatives in the recent midterm elections, but aerospace and defense stocks and exchange traded funds did not seem to mind.

The iShares U.S. Aerospace & Defense ETF (ITA), PowerShares Aerospace & Defense Portfolio (PPA) and the SPDR S&P Aerospace & Defense ETF (XAR) have been one of the steadiest “Trump trades,” but those funds also posted solid gains following the midterm election results.

Some analysts do not see the Democrat-controlled House as a significant threat to aerospace and defense equities.

“Our bull case envisions bipartisanship and an avoidance of gridlock, which creates funding certainty for defense names, but our bear case anticipates budget chaos and sequestration for fiscal 2020,” said Morningstar in a recent note. “Our base case entails a muddle-through in which a 2020 continuing resolution, which freezes funding at the previous year’s levels, occurs but an agreement to avoid budget caps is eventually struck. Flying under investors’ radar is the likely resignation of Defense Secretary James Mattis. Depending on who replaces Mattis and when, we think the Pentagon might be at a disadvantage as it battles for its piece of the fiscal 2020 appropriations.”

Big-Name Defense Stocks

ITA is a cap-weighted ETF, meaning it has larger weights to big-name defense stocks, including Dow components Boeing (BA) and United Technologies (UTX) . XAR is an equal-weight ETF. PPA holds 50 stocks “involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations,” according to PowerShares.

Aerospace and defense stocks are part of the broader industrial sector and have been important drivers of the sector’s performance over the past year. In fact, aerospace and defense names have been industrial leaders.

Related: 4 Popular Aerospace ETFs Can Keep Surging

House Armed Services Committee ranking member Rep. Adam Smith will assume the chair of that committee. Smith represents an area of Washington state that is home to some important Boeing operations.

“He worked effectively with the Republicans on the committee while he was in the minority, indicating that he’s probably a bit more pragmatic vis-a-vis defense funding than some of his campaign rhetoric suggests,” said Morningstar.

ITA, the largest aerospace and defense ETF, is up 6.72% this year.

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