A Promising Basket of Aerospace and Defense Stocks

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the aerospace and defense industry to prosper over the long run due to the seeming inevitability of air travel and wars, the PowerShares Aerospace & Defense ETF (NYSE: PPA  ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The PowerShares ETF's expense ratio -- its annual fee -- is 0.60%. The fund is very small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

This ETF has performed reasonably, beating the world markets by a modest margin over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

With a low turnover rate of 12%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.

What's in it?
This industry is facing some uncertainty, as our nation's financial troubles are leading to cuts in defense spending. Thus, lots of aerospace and defense companies didn't post impressive performances over the past year. (Fortunately, their fortunes may well change in the coming years.)

SAIC (NYSE: SAI  ) , the eighth-largest government contractor, fell 29%. Shareholders were disappointed recently when the company lost its biggest federal contract, worth up to $4.6 billion, to Lockheed Martin. It's not all bad news, though, as SAIC is still inking contracts, such as one worth up to $36 million with the U.S. Air Force. SAIC will be changing its name soon, too, due to an internal merger, to Science Applications International Corp.

Aerospace and defense parts supplier Esterline Technologies (NYSE: ESL  ) dropped 22%. In its last quarter, it posted a strong 16% increase in revenue, with its sensors and systems sales more than doubling and its backlog growing. But the company lowered its near-term projections, too. Some think the company may be acquired, but that remains speculation at this point. Folks at the Relational Investors hedge fund, which is Esterline's third-largest shareholder, don't like the company's recent performance and are encouraging the company to consider selling itself.

Computer Sciences (NYSE: CSC  ) , recent winner of a NASA "Contractor of the Year" award, shed 35%, reporting poor results in its latest quarter and announcing plans to cut costs and begin a turnaround. It has been busy collecting contracts, such as one worth up to $91 million to provide cloud-computing services for the Federal Aviation Administration. It's also expanding into new areas, such as the e-delivery, cloud-based service it's offering to insurance companies.

Industry behemoth Boeing (NYSE: BA  ) , meanwhile, ended the past 12 months in the black, up 1%. Investors are happy that its long-awaited Dreamliner is finally in production, but some worry about defense cuts, as Boeing gets roughly 40% of its revenue from the U.S. government. Europe's financial woes could hurt Boeing, too, via a slowdown in orders. Still, its future looks promising, partly due to its new fuel-efficient planes, which are extra appealing in these days of high fuel prices.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Lockheed Martin Corporation Com. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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