Trump Revs Up Defense ETFs With Military Budget Plan

March 03, 2017

Defense ETFs Outperforming

Resistance or not, it's likely that defense spending will increase in some fashion under a Trump administration―at least that's what the market thinks. Defense and aerospace ETFs have all outperformed the broader market this week, this year and since the election of Donald Trump in November.

The $2.5 billion iShares U.S. Aerospace & Defense ETF (ITA), which holds a market-cap-weighted basket of stocks in the industry, gained 18.6% since Nov. 8, outpacing the 12.8% return for the S&P 500 in the same time frame.

ITA, like other similar ETFs, tracks "aerospace & defense" firms, which are a subgroup under the broader industrials sector. A full 88% of ITA's portfolio is allocated to firms within this group. Top holdings include Boeing, United Technologies and Lockheed Martin. Together, these names make up more than a quarter of the fund's holdings.

The two other big U.S. defense-focused ETFs on the market― the equal-weighted SPDR S&P Aerospace & Defense ETF (XAR) and the cap-weighted PowerShares Aerospace & Defense Portfolio (PPA)―also outperformed, with returns of 20.3% and 16.7%, respectively, since the election. Both funds have about $515 million in assets.

More than 90% of XAR's portfolio is in aerospace and defense stocks, but each holding is equal-weighted, which gives the fund a smaller-cap tilt than the aforementioned ITA. In the case of XAR, Boeing, with a market cap of more than $100 billion, has the same 4% weighting as Taser, with a modest $1 billion market cap. This smaller tilt has helped the fund outperform recently, as small companies rallied more than their larger counterparts.

Meanwhile, out of the three ETFs in the space, PPA has the lowest allocation to aerospace and defense stocks, at 67%. The rest of its portfolio is in other groups such as industrial conglomerates, IT services and communications.

Because the fund is market-cap-weighted, top holdings are still the familiar Boeing, United Technologies and Lockheed Martin. But its broader purview has led it to slightly lag competitors such as ITA and XAR. 

Ticker Fund Return For 2017 Return Since Election
SPY SPDR S&P 500 ETF 7.30% 12.70%
ITA iShares U.S. Aerospace & Defense ETF 9.60% 18.60%
PPA PowerShares Aerospace & Defense Portfolio 7.60% 16.70%
XAR SPDR S&P Aerospace & Defense ETF 10.10% 20.30%

 

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