Exchange Traded Funds (ETFs)

This Aerospace and Defense Fund Gets the Job Done

The PowerShares Aerospace & Defense ETF (PPA) is a smaller exchange-traded fund (ETF) than the two “big guns” in the aerospace and defense sector — the SPDR S&P Aerospace & Defense ETF (XAR) and the iShares U.S. Aerospace and Defense ETF (ITA) — but the mighty mite has generated some substantial returns this year.

This fund offers a traditional take on a market sector by investing in defense companies. The defense industry makes up about 5% of U.S. gross domestic product (GDP).

The fund allocates to the companies it holds by using a market-cap-weighting strategy. As a result, more than half of PPA’s assets are invested in large-cap securities, with mid-caps making up another 35%.

The companies held in the portfolio range between value and growth, with a greater percentage of the companies characterized as growth investments, but only narrowly so. This fund pays out a dividend yield of slightly more than 1%, while the expense ratio comes in at around 0.6%. Assets managed currently total $775 million.

Over the last 12 months, PPA has had a strong showing, rising 39.63%. Compared with the 19% return of the S&P 500 Index over the same time, PPA’s return is virtually double the amount. This performance is slightly weaker than that of the other defense funds, but is not far behind. As the chart below shows, PPA has seen fairly smooth sailing all year long, as the fund’s share price has come nowhere near its 200-day moving average.

The top 10 holdings of PPA comprise 56.7% of its assets. The top five are United Technologies Corp. (UTX), 6.98%; Lockheed Martin Corp. (LMT), 6.90%; Honeywell International Inc. (HON), 6.84%; Boeing Co. (BA), 6.81%; and General Dynamics Corp. (GD), 6.58%. None of the top 10 companies should be surprising fixtures in a large-cap aerospace and defense fund and many are household names.

For investors seeking a typical ETF investment strategy in the aerospace and defense sector at a cheaper price than other options, the PowerShares Aerospace & Defense ETF (PPA) makes for a solid and uncontroversial choice.

Jim Woods

Jim Woods is a 20-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor. Jim is the editor of Intelligence Report, Investing Edge, the Bullseye Stock Trader, and The Deep Woods (formerly the Weekly ETF Report). His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. His articles have appeared on many leading financial websites, including StockInvestor.com, InvestorPlace.com, Main Street Investor, MarketWatch, Street Authority, Human Events and many others. Jim formerly worked with Investor’s Business Daily founder William J. O’Neil, helping to author training courses in the CANSLIM stock-picking methodology. The independent firm TipRanks rates Jim the No. 3 financial blogger in the world (out of more than 6,000). TipRanks calculates that, since 2012, he's made 361 successful recommendations out of 499 total, earning a success rate of 72% and a +15.3% average return per recommendation. He is known in professional and personal circles as “The Renaissance Man,” because his expertise includes such varied fields as composing and performing music; Western horsemanship, combat marksmanship, martial arts, auto racing and bodybuilding. Jim holds a BA in philosophy from the University of California, Los Angeles, and is a former U.S. Army paratrooper. A self-described “radical for capitalism,” he celebrates the virtue of making money from his Southern California horse ranch.