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Why Defense ETFs Deserve a Special Mention This Memorial Day

Sanghamitra Saha
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Very few countries can match the military skill and prowess of the United States. But attaining this high feat has not been easy, with many having scarified their lives while ensuring the nation’s security. On Memorial Day, we pay homage to those heroes. 

Along with showing reverence to those lost lives, a closer look at the U.S. Aerospace and Defense industry seems warranted on the occasion of Memorial Day. In this regard, we dig deeper into the industry and highlight the performance of the related ETFs.

Cancellation of Meeting Between North Korea and U.S.

President Donald Trump cancelled his meeting with North Korean Leader Kim Jong-Un, which sent defense stocks rallying on May 24. Both countries have a stressed relationship for long (read: ETFs & Stocks in Focus as Trump Reimposes Sanction on Iran).

On Thursday, the White House called off the planned Jun 12 meeting in Singapore due to North Korea's “tremendous anger and open hostility” directed toward Washington. Though in response to the cancellation of the meeting, Kim Jong Un made comments in a peacemaking tone, sensing a possible warfare, defense stocks went northward. Investors should note that with geopolitical uncertainty on the rise, developed and emerging nations have been increasing their defense spending.

Higher Civilian Demand

Growing civilian demand thanks to an improving global economy, aging commercial aircraft and the consequent rise in aircraft orders, a pickup in defense spending in certain other countries including Brazil, India and Saudi Arabia, plus technological innovation and acquisitions brightened the appeal for the sector.

Trump Bump

Trump’s victory in the U.S. presidential election in Nov 2016 provided a boost to the defense sector due to his proposals for a massive increase in defense spending. He is expected to boost U.S. military spending considerably. Plus, the intrinsic strength of the stocks in this space is worthy of mention.

Mergers and Acquisitions

The Aerospace and Defense sector is thriving with mergers and acquisitions. An analysis by Capstone Headwaters revealed that the amount of activities within the aerospace and defense world rose 2% in 2017 compared with a 16% decline the prior year.

Great Earnings Picture

Aerospace, which accounts for a meager 1.7% of the S&P 500 index, came up with impressive beat ratios in the Q1 reporting cycle. All companies have reported earnings in this season, with 90.9% companies beating earnings estimates while 81.8% surpassing the top line.

The space posted a 37.8% surge in earnings in Q1 on 7.8% revenue growth. The scenario should be steady in Q2 with a likely earnings growth rate of 17.6% on 4.2% revenue growth, as per the Earnings Trends issued on May 23, 2018 (read: Play Sector ETFs With Strong Beat Ratios).

The space belongs to a top-ranked (top 50%) Zacks sector. Investors should note that presently there are three defense ETFs available, all of which have a Zacks ETF Rank #1 (Strong Buy) with moderate levels of risk.

Investors should note that three defense and aerospace ETFs, including iShares US Aerospace & Defense ITA, SPDR S&P Aerospace & Defense ETF XAR and PowerShares Aerospace & Defense ETF PPA, have outperformed the S&P 500 based ETF SPY in the past year (as of May 24, 2018) (see all Industrials ETFs here).

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ISHARS-US AEROS (ITA): ETF Research Reports
SPDR-SP AER&DEF (XAR): ETF Research Reports
PWRSH-AERO&DEF (PPA): ETF Research Reports
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