Aerospace and defense as growth drivers for ETFs amid Iran war

The aerospace and defense trade is taking investors deeper into space and exchange-traded funds want a part of it.

VettaFi’s Cinthia Murphy told CNBC’s “ETF Edge” this week that there are now more ETFs tackling the space theme more directly — listing the Procure Space ETF (UFO) and Global X Defense Tech ETF (SHLD) as examples.

“They have the cybersecurity element: Satellites, communications, navigation. So, the defense theme is actually a very colorful theme nowadays. It has a lot of interesting names,” the firm’s director of research said. “It really isn’t just about Lockheed Martin and some of the traditional names that you find in ITA [iShares US Aerospace & Defense ETF].”

As of Thursday’s close, the Procure Space ETF is up almost 19% since the Iran War started on Feb. 28 while the Global X Defense Tech ETF is off 8%.

Meanwhile, the more traditional iShares US Aerospace & Defense ETF is down 10% in the same period. Its website lists the top holdings as GE Aerospace, RTX and Boeing.

Murphy expects investor interest in aerospace and defense stocks to persist long after the Iran war is resolved.

“Any time you have geopolitical heat, it puts this kind of theme on the map,” said Murphy. “But it’s another big growth area because there’s so much new technology coming up and so much investment coming into this space. A lot of governments are making commitments for much more investments in the next five to ten years.”

Murphy suggests historic interest in the SpaceX initial public offering, which is largely expected in June, is fueling even more interest in the space.

“One of the things we’ve spoken about the most this year is about space exploration and space investment given we’re about to see the SpaceX IPO,” added Murphy.

SS&C Technologies‘ Paul Baiocchi is also bullish on aerospace and defense names. He predicts a monster ramp-up in defense budgets around the world will generate solid returns for the group.

“All of these things are converging for the same limited scarce resources,” the financial technology firm’s head of fund sales and strategy said in the same interview. “Near-term, medium-term [and] long-term, commodities allocations, energy infrastructure [and] electrification infrastructure all stand to benefit from the massive amount of investment that’s coming from both the public and private sectors.”

Plus, he sees artificial intelligence playing a key role.

“The bottleneck for AI might be chips, but it’s also power and transmission and the raw materials that go into construction,” Baiocchi said. “If you look at defense, that’s also part of the constrain is the availability of the rare earths.”