Aerospace and Defense Stocks Have Struggled to Take Off. It Might Be Their Time. -- Journal Report
November 07 2020 - 6:50PM
Dow Jones News
By Gerrard Cowan
Aerospace and defense stocks have had a turbulent year. However,
some analysts say there could be opportunities for patient
investors.
Aerospace and defense exchange-traded funds -- which focus on
both the commercial and military markets, or on particular sectors
-- have had returns ranging from about minus 2% to minus 80% or
worse for 2020. Lockdowns around the world brought the industry to
a virtual standstill for long periods -- which had a big impact on
prominent stocks in sectoral ETFs, like Boeing and Raytheon
Technologies, says Dave Nadig, chief investment officer and
director of research at ETF Flows.
Room to soar
However, recent price drops could provide an entry opportunity
for investors, says Jeff Spiegel, U.S. head of iShares Megatrend
& International ETFs, which operates iShares U.S. Aerospace
& Defense ETF (ITA), a $2.5 billion fund that is down 26.5% for
the year to date. He says that military spending has risen in
countries including the U.S., Germany and France in recent years,
and that unlike commercial aviation, "there was no immediate
drop-off" with the onset of the pandemic.
Such spending could well remain high in the coming years, Mr.
Spiegel says. While government budgets have been strained because
of funding Covid-19 responses, existing military investment is
unlikely to be reduced at a time when stimulating economies and
boosting industrial jobs is such a focus. Additionally, he says
that aerospace and defense companies invest heavily in
research-and-development projects, which could lead to
breakthroughs in areas like artificial intelligence that have the
potential to generate profits in commercial markets.
State Street Global Advisors has seen the impact of the growing
focus on nontraditional technologies. While its $1 billion SPDR
S&P Aerospace & Defense ETF (XAR) is down 16.3% for the
year to date, the $15.8 million SPDR S&P Kensho Future Security
ETF (FITE) has had a significantly better performance, down 2.3%.
Matt Bartolini, head of SPDR Americas Research at State Street
Global Advisors, says this is partly due to FITE's concentration on
less traditional, though rapidly growing, military and security
focuses, such as cybersecurity, border security, robotics and
drones.
Such technologies could come into greater focus thanks to
Covid-19, he says. For example, "tightening security restrictions
at borders, airports, train terminals and sporting events --
similar to what occurred during the years following the 9/11
terrorist attacks -- may lead to more tracing/scanning technology,
drone usage and facial-recognition technologies," Mr. Bartolini
says.
'Tense as ever'
There is also the broader security picture to consider, says
Nick Kalivas, senior equity ETF strategist at Invesco, which
manages Invesco Aerospace & Defense ETF (PPA), a $631.7 million
fund that is down 14.4% for the year to date. Concerns over
military tensions around the globe are likely to continue to fuel
spending by the U.S., as well as investment by the country's NATO
allies.
"The world remains as tense as ever, in terms of geopolitical
dynamics," he says.
Meanwhile, Sylvia Jablonksi, Direxion's managing director of
capital markets, says that while there are likely to be
opportunities in defense looking forward, commercial aviation also
shouldn't be overlooked. As vaccines become available and
restrictions ease, air travel is almost certain to pick up sooner
or later, says Ms. Jablonski, whose company operates Direxion Daily
Aerospace & Bull 3X Shares ETF (DFEN). The $234.7 million fund
is down 81.1% year to date.
"If you're a patient, long-term investor, there could be
opportunities now," Ms. Jablonski says.
Mr. Cowan is a writer in Northern Ireland. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
November 07, 2020 18:35 ET (23:35 GMT)
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