Aerospace stocks and exchange traded funds were lifted Monday on news of an arms deal between the U.S. and some Gulf states, including Saudi Arabia.
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” and currently reside near record highs.
Other potential catalysts for aerospace ETFs include include, renewed airline pricing power evidenced by higher ticket prices, and more fees paid per traveler, increased airline profitability, new aircraft program launches and continued demand for aircraft models and technology.
Although the aerospace and defense industry is perceived as being beholden to Uncle Sam’s whims, the allure of late-cycle sectors, including industrials, in a rising rate environment remains in place. Industrials perform well when interest rates rise because rising rates can go hand-in-hand with economic growth.
“Saudi Arabia and the U.S. are expected to agree to business deals and potential investments worth $300 billion over the course of U.S. President Donald Trump’s visit to Riyadh, solidifying the U.S.-Saudi commercial relationship as the kingdom’s economy cracks open,” reports MarketWatch.
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.
“President Donald Trump signed a nearly $110 billion weapons deal with Saudi Arabia. The deal will be worth $350 billion over 10 years,” reports CNBC. “Jet maker Boeing also signed a handful of deals with Saudi Arabia during Trump’s weekend visit, involving the sale of military and passenger aircraft. Its stock was up about 2 percent.”
For more information on the defense industry, visit our aerospace & defense category.