Time Is Right To Stick With Aerospace And Defense ETFs.
Byline: ETF Professor
Amid flaring geopolitical tensions with Iran, it's not surprising that some market experts are recommending aerospace and defense stocks. While that's a prosaic response to recent flare up with Iran, data suggest it's also sensible.
"Aerospace and defense stocks typically outperform the S&P 500 in the six months after Middle East crisis events," according to CNBC. "Defense stocks have climbed and the broader market has sold off following last week's killing of Iranian military leader Qasem Soleimani."
That bit of market precedent could lead investors back to aerospace exchange traded funds, including the iShares U.S. Aerospace & Defense ETF (CBOE: ITA), Invesco Aerospace & Defense ETF (NYSE:PPA) and the SPDR S&P Aerospace & Defense ETF (NYSE:XAR).
Why It's Important
PPA and XAR generated returns in excess of 39% last year while ITA was restrained by a large stake in Boeing (NYSE:BA), but that ETF still managed to jump 30.5%. Those impressive performances could be one reason why, to start 2020, ITA and XAR have seen modest outflows while new capital has come into or departed PPA.
Still, investors shouldn't sleep on the aforementioned aerospace. In the six months following a Middle East crisis, the S&P 500 Aerospace and Defense Index is positive 79% of the time, posting an average gain of 6.7%, more than double the average gain of 3.3% for the S&P 500 itself, according to CNBC data.
If the favorable historical precedent repeats for aerospace equities, the $2 billion XAR could be ETF of choice for investors. Over the past three years, the equal-weight XAR has outperformed the cap-weighted ITA by nearly 1,400 basis points.
XAR follows the S&P Aerospace & Defense Select Industry Index and holds 33 stocks, none of which exceed weights of 4.09%, according to issuer data.
XAR's top 10 holdings include Northrup Grumman (NYSE:NOC), Huntington Ingalls Industries (NYSE:HII) and Raytheon (NYSE:RTN), stocks with histories of performing well after Middle East tensions escalate.
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|Date:||Jan 7, 2020|
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