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Defense Sector Worth A Closer Look

April 7th, 2014

defense stocksRough trading to start 2014 is demonstrating that the easy upward slope of last year is likely a thing of the past. Correct sector selection will likely be needed to power gains this time around, especially given the recent worries regarding some of the former market leaders.

Companies in both the technology and biotech segments—which have been soaring and powering many portfolios for the past few months—have started to see some weakness in recent trading. While this could just be a temporary pull-back, it may also represent the beginning of the high beta name run and that other segments are due to take over leadership in the market.

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One segment that investors definitely need to keep a closer eye on is the aerospace and defense sector. This industry currently has a Zacks Industry Rank in the top 5% and it is seeing some strong fundamental factors underpinning its lofty position too.

Obviously, one of the prime reasons for the renewed interest in the space is the rising tensions in Eastern Europe. A more aggressive Russia could spur Western countries in Europe to finally open up their pocketbooks and spend on defense to combat this new threat.

Meanwhile, concerns about reduced military spending back in the U.S. have pretty much been taken in stride by the sector. Most of the cuts look to hit personnel, saving many of the ‘big ticket’ items that several defense contractors see huge revenues from. This suggests that the budget issues will remain a non-factor for the space, at least in the near term.

And if that wasn’t all, the aerospace side of the equation is also looking quite promising too. Civilian demand for air travel is surging across the globe, and this is boosting demand for jets and related hardware, helping a number of companies in the sector which have huge operations in this corner of the market (read 3 Top Ranked ETFs that Will Crush the Market in 2014).

So overall, the sector is looking quite promising, and especially so given some of the outsized weakness in many of the high-flying names in other key sectors. Fortunately there are a few top ranked picks in this corner of the market, and we have described a few of our favorites below, any of which could be ready to take-off and lead the market higher in Q2:

Top Aerospace and Defense ETFs: 

SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR)

This is the cheapest choice in the aerospace and defense ETF market, charging investors just 35 basis points a year in fees for its exposure. The fund takes an equal weight approach, tracking the S&P Aerospace and Defense Select Industry Index, holding about three dozen stocks in its basket.

Due to its equal weight approach, no single stock comprises more than 3.7% of assets, leading to a very spread out profile. This also ensures that mid caps dominate the portfolio, as large cap stocks only account for one-third of the total assets in XAR.

The fund currently receives a top Zacks ETF Rank #1 (Strong Buy), and it could be an interesting choice for investors looking for a cheap, spread out play on this in-focus sector.

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NYSE:ITA, NYSE:XAR


 

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