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Aerospace & Defense ETFs at a 52-Week High: Here's Why

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Aerospace & Defense ETFs like iShares U.S. Aerospace & Defense ETF (ITA - Free Report) , S&P Aerospace & Defense SPDR (XAR - Free Report) and Invesco Aerospace & Defense ETF (PPA - Free Report) have hit 52-week highs lately. Although the broader market has been outperforming the defense sector this year, the sector still holds strength and has the potential to march higher in the coming days.

Below, we highlight a few factors that are acting as tailwinds for the Aerospace & Defense sector.

Continued Geopolitical Tension & Increase in Defense Budget

The ongoing war in the Middle East and the East Europe are causing geopolitical tensions in one form or other. Yemen’s Houthis have been attaching ships in the Red Sea. China’s defense budget for 2023 grew by 7.2%, marking a straight eighth consecutive year increase. The growth marked the fastest clip since 2019. India is also planning to boost defense spending by 13% with billions to be invested for new weapons.

The United States shells out more on national defense than China, India, Russia, United Kingdom, Saudi Arabia, Germany, France, Japan, and South Korea — combined. U.S. defense spending makes up more than 10% of all federal spending and nearly half of discretionary spending.

Rising M&A Activity for Aerospace

Per HigherGov, there was solid acquisition activity in 2022 despite economic headwinds and rising rates. In 2023, deal volumes increased in aerospace and defense. Continued geopolitical threats, robust company cashflows, and continued investment in critical technologies will likely fuel ADG transaction volumes in the coming days as well.

Cheaper Valuation

The sector has cheaper valuation with a forward P/E of 17.19X against the S&P 500’s P/E of 18.00X. The sector’s price-to-book and price-to-sales ratios are 3.01X and 1.66X, respectively. Both data stand cheaper against the S&P 500’s data of 4.26X and 2.71X, respectively. The sector’s projected EPS growth is 16.26% versus the S&P 500’s EPS growth of 6.50%.

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