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Aerospace and Defense Stocks Have Struggled to Take Off. It Might Be Their Time.

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Aerospace and defense exchange-traded funds have struggled this year.

Aerospace and defense exchange-traded funds have struggled this year.

Photo: I-Hwa Cheng/Bloomberg News

Aerospace and defense stocks have had a turbulent year. However, some analysts say there could be opportunities for patient investors.

Aerospace and defense exchange-traded funds—which focus on both the commercial and military markets, or on particular sectors—have had returns ranging from about minus 2% to minus 80% or worse for 2020. Lockdowns around the world brought the industry to a virtual standstill for long periods—which had a big impact on prominent stocks in sectoral ETFs, like
Boeing
and
Raytheon Technologies,
says Dave Nadig, chief investment officer and director of research at ETF Flows.

Room to soar

However, recent price drops could provide an entry opportunity for investors, says Jeff Spiegel, U.S. head of iShares Megatrend & International ETFs, which operates
iShares U.S. Aerospace & Defense
ETF (ITA), a $2.5 billion fund that is down 26.5% for the year to date. He says that military spending has risen in countries including the U.S., Germany and France in recent years, and that unlike commercial aviation, “there was no immediate drop-off” with the onset of the pandemic.

Such spending could well remain high in the coming years, Mr. Spiegel says. While government budgets have been strained because of funding Covid-19 responses, existing military investment is unlikely to be reduced at a time when stimulating economies and boosting industrial jobs is such a focus. Additionally, he says that aerospace and defense companies invest heavily in research-and-development projects, which could lead to breakthroughs in areas like artificial intelligence that have the potential to generate profits in commercial markets.

State Street Global Advisors has seen the impact of the growing focus on nontraditional technologies. While its $1 billion
SPDR S&P Aerospace & Defense
ETF (XAR) is down 16.3% for the year to date, the $15.8 million
SPDR S&P Kensho Future Security
ETF (FITE) has had a significantly better performance, down 2.3%. Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, says this is partly due to FITE’s concentration on less traditional, though rapidly growing, military and security focuses, such as cybersecurity, border security, robotics and drones.

Such technologies could come into greater focus thanks to Covid-19, he says. For example, “tightening security restrictions at borders, airports, train terminals and sporting events—similar to what occurred during the years following the 9/11 terrorist attacks—may lead to more tracing/scanning technology, drone usage and facial-recognition technologies,” Mr. Bartolini says.

‘Tense as ever’

There is also the broader security picture to consider, says Nick Kalivas, senior equity ETF strategist at Invesco, which manages
Invesco Aerospace & Defense
ETF (PPA), a $631.7 million fund that is down 14.4% for the year to date. Concerns over military tensions around the globe are likely to continue to fuel spending by the U.S., as well as investment by the country’s NATO allies.

“The world remains as tense as ever, in terms of geopolitical dynamics,” he says.

Meanwhile, Sylvia Jablonksi, Direxion’s managing director of capital markets, says that while there are likely to be opportunities in defense looking forward, commercial aviation also shouldn’t be overlooked. As vaccines become available and restrictions ease, air travel is almost certain to pick up sooner or later, says Ms. Jablonski, whose company operates
Direxion Daily Aerospace & Bull 3X Shares
ETF (DFEN). The $234.7 million fund is down 81.1% year to date.

“If you’re a patient, long-term investor, there could be opportunities now,” Ms. Jablonski says.

Mr. Cowan is a writer in Northern Ireland. He can be reached at reports@wsj.com.