Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some aerospace and defense stocks to your portfolio but don't have the time or expertise to hand-pick a few, the SPDR S&P Aerospace & Defense ETF (NYSEMKT:XAR) could save you a lot of trouble. Instead of trying to figure out which stocks in this sector will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. This ETF sports a relatively low expense ratio -- an annual fee -- of 0.35%. The fund is fairly small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This aerospace and defense stock ETF is too young to have a meaningful track record to assess, but it did outperform the world market over the past year. 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.
Why aerospace and defense stocks?
As commercial air fleets age, they inevitably need to be replaced. And until our military shrinks considerably in size, it will continue to stock its hangars and storage areas with lots of planes and defense equipment. Thus, aerospace and defense stocks can count on plenty of future business. (Newer airplanes that are more energy efficient are also a strong draw, given the rising cost of fuel.)
More than a handful of aerospace and defense stocks had strong performances over the past year. TASER International (NASDAQ:AAXN), which makes stun guns and other self-defense products, surged 124%. In recent news, the London Metropolitan Police have signed on to test TASER's AXON body camera systems. TASER has much growth potential, but some find the stock a bit overpriced, with its P/E topping 50. In its fourth quarter, revenue grew by 24% over year-ago levels, but cash flow has been more modest as TASER invests in future growth.
Rhode Island-based Textron (NYSE:TXT) popped 53% over the past 12 months and is trading near a four-year high. Its brands include Cessna small aircraft and Bell helicopters, and the company recently acquired Beechcraft for $1.4 billion. Some weren't thrilled about that, as Textron is carrying significant debt, but the company has been aggressively paying down that debt in recent years. Its fourth quarter featured revenue up 4% and earnings from continuing operations jumping 20%. The company is scheduled to report its first-quarter results on May 1.
L-3 Communications Holdings (NYSE:LLL) has gained 49% over the past year and yields 2.1%. While the company is more nimble than some rivals, it's also quite dependent on the U.S. government for much of its revenue, and has been hurt by military spending cutbacks. While L-3 has been winning lots of defense contracts lately, revenue, free cash flow, and earnings have shrunk in recent years, as have operating margins. Bears don't expect 2014 to be as strong for the company as 2013. L-3's forward P/E looks inviting at 11.7, but that's actually above the stock's five-year average of 9.9. It, too, reports its first-quarter results on May 1.
Another aerospace and defense stock that did well over the past year was United Technologies (NYSE:UTX), rising 30%. It pleased shareholders with a 10% dividend hike last year, and now yields 2.1%. Per CEO Louis Chenevert, the increase "reflects confidence in our portfolio, our strategy and our leadership team to grow earnings over the long term." The company sports brands such as Otis, Sikorsky, and Pratt & Whitney, and it acquired Goodrich last year. (There's talk that it might spin off Sikorsky.) United Technologies has topped earnings expectations for several years in a row. Its next earnings report is due on April 22.
The big picture
If you're interested in adding some aerospace and defense stocks to your portfolio, consider doing so via an ETF. 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.