ITA iShares US Aerospace and Defense ETF

The Aerospace & Defense sector came out as a stalwart in 2013 braving issues like sequestration, budget cuts and cancellation of big-ticket programs. Recently, the industry got some relief thanks to the $1.1 trillion spending bill passed to ease automatic spending cuts and put off another government shutdown.

This new bill brings some respite for the defense sector by providing an additional $45 billion for military and domestic discretionary purpose for 2014. There is also an allotment of $85.2 billion for the Afghanistan war (read: 3 Sector ETFs to Watch for the Budget Battle).

If this was not enough, growing commercial opportunities thanks to an improving global economy, aging commercial aircraft and consequent rise in commercial aircraft orders, a pick-up in defense spending in certain other countries and technological innovation as well as acquisitions will lift the sector. Lower energy prices in the U.S. will also help the space to prosper this year. 

Analysts are anticipating a surge in M&A activity in the space in 2014. As per market researchers, the sector has plenty of cash on hand. This, coupled with a low interest rate environment should prompt the industry players to increase M&A activity.

Aerospace, which accounts for a meager 1.5% of the S&P 500 index, is expected to speed up earnings growth this year and in the next. As per the Zacks Earnings Trend, earnings from this industry are expected to go up 7.2% in 2014 and 7.9% in 2015 from the expected level of 6.9% in 2013. Revenues are expected to grow 2.2% in 2014 but decline 0.9% in 2015 (read: Aerospace and Defense ETF Investing 101).

Most of the funds tracking the sector rewarded investors with almost double the gain than what was offered by the broader market fund SPDR S&P 500 ETF (SPY) over the last three months.

Given this surprisingly bullish tone, a look at some of the top ranked ETFs in the Aerospace and Defense industry could be a good way to target the best of the segment with lower levels of risk. In order to do this, investors can look at the Zacks ETF Rank and find the top ETFs in the above mentioned sector (Read: Best ETF Strategies for 2014).

About the Zacks ETF Rank

The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while these also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.

For investors seeking to apply this methodology to their portfolio in the Aerospace and Defense sector, we have taken a closer look at the top ranked ITA. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below:

ITA in Focus

iShares U.S. Aerospace & Defense ETF (ITA) follows the Dow Jones U.S. Select Aerospace & Defense Index, giving exposure to about 39 companies. The ETF is pretty popular in the space, with nearly $300 million in AUM and average daily volume of about 50,000 shares a day. Thus bid-ask spread should not be high for this product. The product is pretty reasonable from an industrial equities cost point of view, charging investors 45 basis points a year.

ITA is a concentrated choice with about 56.73% of its assets invested in the top 10 holdings. Boeing (BA), United Technologies (UTX) and Lockheed Martin (LMT) are the top three choices in the basket. All three of these receive 6.3% to 9.3% of assets, so there is definitely some concentration in these names. Aerospace takes about 55% of the asset base while Defense accounts for the rest.

Style-wise, the fund is a nice mix of growth and value stocks. Large caps constitute half the assets thus staving off excessive fluctuation. This could be a positive aspect for the fund as bigger companies normally have increased international exposure which is what the companies belonging to the U.S. Aerospace and Defense industry need currently.

The fund gained a handsome 57.2% in 2013. The ETF is currently hovering near its 52-week high level. ITA has a Zacks ETF Rank #1 (Strong Buy) with a ‘Low’ risk outlook, and may be an excellent choice for investors this year as well.

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BOEING CO (BA): Free Stock Analysis Report
 
ISHARS-US AEROS (ITA): ETF Research Reports
 
LOCKHEED MARTIN (LMT): Free Stock Analysis Report
 
SPDR-SP 500 TR (SPY): ETF Research Reports
 
UTD TECHS CORP (UTX): Free Stock Analysis Report
 
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