Aerospace and defense exchange traded funds have been hit hard by fears of budget cuts, but the ETFs may provide an efficient vehicle for investors who think the selling is overdone, investment researcher Morningstar says.
Over the past few months, concerns over the U.S. debt ceiling and budget shortfalls tell investors that there will be possible cuts to federal spending. According to Morningstar equity analysts, defense spending will be cut at some point soon.
“Further bolstering this view is the fact that although President Obama and Congress reached a deal over the summer to lift the debt ceiling and cut the rate of growth of some spending, that pact was predicated on reducing the budget deficit in the future by another $1.8 trillion in cuts that are to be decided in the coming months by a bi-partisan committee of Congress, known as Super Congress,” Robert Goldsborough, ETF analyst at Morningstar, wrote.
The uncertainty surrounding the aerospace and defense sector could cause investors to be wary of single-stock picking. There are two such ETFs that are trading below Morningstar’s fair value estimates for the funds, with adjustments for the upcoming budget cuts factored in. The estimates are based on analysis of the ETFs’ stock holdings.
iShares Dow Jones US Aerospace & Defense (NYSEARCA:ITA) gives 41% of assets to defense, with 58% given to aerospace companies. ITA is trading at 89% of Morningstar’s estimate of fair value, reports Goldsborough. [As Defense Spending Sees Change, Where are ETFs?]
PowerShares Aerospace & Defense (NYSEARCA:PPA) contains 51 aerospace and defense companies. The index is market cap-weighted. PPA is trading at 83% of Morningstar’s equity analysts estimates of fair value.
iShares Dow Jones US Aerospace & Defense ETF (ITA)
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Tisha Guerrero contributed to this article.