A Spirit commercial airliner prepares to land at San Diego International Airport in San Diego, California, U.S., January 18, 2024.
Mike Blake | Reuters
Spirit Airlines shares tumbled to a record low on Friday after a report that it’s exploring Chapter 11 bankruptcy protection. The carrier faces a deadline this month to renegotiate more than $1 billion in debt.
A bankruptcy filing would mark a dramatic turn for the carrier with its iconic yellow planes that caters to budget-conscious travelers.
Profitable and punctual before the pandemic, Spirit’s no-frills service became a punchline for late-night comedians and a thorn in the side of big network carriers, enticing customers with double-digit fares and fees for everything else from seat assignments to carry-on luggage.
But big airlines soon successfully copied much of that business model with their lowest bare-bones fares. And a federal judge at the start of the year blocked Spirit’s planned acquisition by JetBlue Airways on antitrust grounds, halting what both carriers argued was a key avenue to compete with larger rivals. The scuttled dealleft Spirit on its own to struggle with a Pratt & Whitney engine recall, shifting consumer travel patterns and higher costs.
After the JetBlue deal fell apart, Spirit said in January that it was looking at options to refinance its debt.
Spirit has $1.1 billion in loyalty-program backed debt that is due next September. It has until Oct. 21 to refinance or extend those secured notes.
The carrier has been losing money since 2020 and has reported disappointing results this year, including a nearly $193 million loss in the second quarter. The company has spent much of this year scrambling to cut costs, including furloughing pilots, slashing flights and deferring Airbus jetliner orders.
Spirit reduced its November and December capacity growth plans by about 17%, Barclays airline analyst Brandon Oglenski said earlier this week.
“As we’ve said, Spirit has been implementing a comprehensive plan to help us better compete, strengthen our balance sheet, and return to profitability,” CEO Ted Christie said in a note to staff on Friday. “We remain engaged in productive conversations with our bondholders, and we’re focused on securing the best outcome for the business as quickly as possible.”
A Spirit spokesman declined to comment on a the Wall Street Journal report that the carrier is considering a bankruptcy filing. Spirit adviser Perella Weinberg Partners declined to comment.
Spirit’s stock price dropped more than 24% Friday to a record low of $1.69. Shares are down nearly 90% so far this year.
Shares of Frontier Airlines, which originally planned to merge with fellow budget airline Spirit before JetBlue swooped in in 2022, surged 16% on Friday. Shares of other airlines also rallied.
A pilot performs a walkaround before a United Airlines flight
Leslie Josephs/CNBC
U.S. passenger airlines have added nearly 194,000 jobs since 2021 as companies went on a hiring spree after spending months in a pandemic slump, according to the U.S. Department of Transportation. Now the industry is cooling its hiring.
Airlines are close to their staffing needs but the slowdown is also coming in part because they’re facing a slew of challenges.
Annual pay for a three-year first officer on midsized equipment at U.S. airlines averaged $170,586 in March, up from $135,896 in 2019, according to Kit Darby, an aviation consultant who specializes in pilot pay.
Since 2019, costs at U.S. carriers have climbed by double-digit percentages. Stripping out fuel and net interest expenses, they’ll be up about 20% at American Airlines this year and around 28% higher at both United Airlines and Delta Air Lines from 2019, according to Raymond James airline analyst Savanthi Syth.
It is more pronounced at low-cost airlines. Southwest Airlines‘ costs will likely be up 32%, JetBlue Airways‘ up nearly 35% and Spirit Airlines will see a rise of almost 39% over the same period, estimated Syth, whose data is adjusted for flight length.
Friday’s U.S. jobs report showed air transportation employment in August roughly in line with July’s.
But there have been pullbacks. In the most severe case, Spirit Airlines furloughed 186 pilots this month, their union said Sunday, as the carrier’s losses have grown in the wake of a failed acquisition by JetBlue Airways, a Pratt & Whitneyengine recall and an oversupplied U.S. market. Last year, even before the merger fell apart, it offered staff buyouts.
Other airlines are easing hiring or finding other ways to cut costs.
Frontier Airlines is still hiring pilots but said it will offer voluntary leaves of absence in September and October, when demand generally dips after the summer holidays but before Thanksgiving and winter breaks. A spokeswoman for the carrier said it offers those leaves “periodically” for “when our staffing levels exceed our planned flight schedules.”
Southwest Airlines expects to end the year with 2,000 fewer employees compared with 2023 and earlier this year said it would halt hiring classes for work groups including pilots and flight attendants. CFO Tammy Romo said on an earnings call in July that the company’s headcount would likely be down again in 2025 as attrition levels exceed the Dallas-based carrier’s “controlled hiring levels.”
United Airlines, which paused pilot hiring in May and June, citing late-arriving planes from Boeing, said it plans to add 10,000 people this year, down from 15,000 in each 2022 and 2023. It plans to hire 1,600 pilots, down from more than 2,300 last year.
It’s a departure from the previous years when airlines couldn’t hire employees fast enough. U.S. airlines are usually adding pilots constantly since they are required to retire at age 65 by federal law.
Airlines shed tens of thousands of employees in 2020 to try to stem record losses. Packages of more than $50 billion in taxpayer aid that were passed to get the industry through its worst-ever crisis prohibited layoffs, but many employees took carriers up on their repeated offers of buyouts and voluntary leaves.
Then, travel demand snapped back faster than expected, climbing in earnest in 2022 and leaving airlines without experienced employees like customer service agents. It also led to the worst pilot shortage in recent memory.
In response, companies — especially regional carriers — offered big bonuses to attract pilots.
But times have changed. Even air freight giants were competing for pilots in recent years but demand has waned as FedEx and UPS look to cut costs.
American Airlines CEO Robert Isom said in an investor presentation in March that the carrier added about 2,300 pilots last year and that it expects to hire about 1,300 this year.
“We will be hiring for the foreseeable future at levels like that,” he said at the time.
Despite the lower targets, students continue to fill classrooms and cockpits to train and build up hours to become pilots, said Ken Byrnes, chairman of the flight department at Embry-Riddle Aeronautical University.
“Demand for travel is still there,” he said. “I don’t see a long-term slowdown.”
Grocery items are offered for sale at a supermarket on August 09, 2023 in Chicago, Illinois.
Scott Olson | Getty Images
When Kyle Connolly looks back at 2023, she sees it as a year defined by changes and challenges.
The newly single parent reentered the workforce, only to be laid off from her job at a custom home-building company in November. At the same time, Connolly has seen prices climb for everything from her Aldi’s grocery basket to her condo’s utility costs.
In turn, she’s cut back on everyday luxuries like eating out or going to the movies. Christmas will look pared down for her three kids compared to years prior.
“I’ve trimmed everything that I possibly can,” said the 41-year-old. “It sucks having to tell my kids no. It sucks when they ask for a little something extra when we’re checking out at the grocery store and having to tell them, ‘No, I’m sorry, we can’t.’”
Economic woes have seemed more apparent within her community in Florida’s panhandle. Connolly has noticed fewer 2022 Chevy Suburbans on the road, replaced by older Toyota Camry models. The waters typically filled with boats have been eerily quiet as owners either sold them or tried to cut back on gas costs. Fellow parents have taken to Facebook groups to discuss ways to better conserve money or rake in extra income.
The struggles among Connolly and her neighbors highlight a key conundrum puzzling economists: Why does the average American feel so bad about an economy that’s otherwise considered strong?
By many accounts, it has been a good year on this front. The annualized rate of price growth is sliding closer to a level preferred by the Federal Reserve, while the labor market has remained strong. There’s rising hope that monetary policymakers have successfully cooled inflation without tipping the economy into a recession.
Yet closely watched survey data from the University of Michigan shows consumer sentiment, while improving, is a far cry from pre-pandemic levels. December’s index reading showed sentiment improved by almost 17% from a year prior, but was still nearly 30% off from where it sat during the same month in 2019.
“The main issue is that high prices really hurt,” said Joanne Hsu, Michigan’s director of consumer surveys. “Americans are still trying to come to grips with the idea that we’re not going back to the extended period of low inflation, low interest rates that we had in the 2010s. And that reality is not the current reality.”
Still, Hsu sees reason for optimism when zooming in. Sentiment has largely improved from its all-time low seen in June 2022 — the same month the consumer price index rose 9.1% from a year earlier — as people started noticing inflationary pressures recede, she said.
One notable caveat was the drop in sentiment this past May, which she tied to the U.S. debt ceiling negotiations. The 2024 presidential election has added to feelings of economic uncertainty for some, Hsu said.
Continued strength in the labor market is something economists expected to sweeten everyday Americans’ views of the economy. But because consumers independently decide how they feel, jobs may hold less importance in their mental calculations than inflation.
There are still more job openings than there are unemployed people, according to the latest data from the Bureau of Labor Statistics. Average hourly pay has continued rising — albeit at a slower rate than during the pandemic — and was about 20% higher in November than it was in the same month four years ago, seasonally adjusted Labor Department figures show.
That’s helped boost another widely followed indicator of vibes: the Conference Board’s consumer confidence index. Its preliminary December reading was around 14% lower than the same month in 2019, meaning it has rebounded far more than the Michigan index.
While the Michigan index compiles questions focused on financial conditions and purchasing power, the Conference Board’s more closely gauges one’s feelings about the job market. That puts the latter more in line with data painting a rosier picture of the economy, according to Camelia Kuhnen, a finance professor at the University of North Carolina.
“You think that they’re talking about different countries,” Kuhnen said of the two measures. “They look different because they focus on different aspects of what people would consider as part of their economic reality.”
A hot job market can be a double-edged sword for sentiment, Michigan’s Hsu noted. Yes, it allows workers to clinch better roles or higher pay, she said. But when those same workers put on their consumer hats, a tight market means shorter hours or limited availability at their repair company or veterinarian’s office.
Other reasons why consumers feel positively about the economy this year can only be true for certain — and often wealthier — groups, economists say.
UNC’s Kuhnen said Americans would be pleased if they are homeowners seeing price appreciation. Another reason for optimism: If they had investments during 2023’s stock market rebound.
Without those cushions, people on the lower end of the income spectrum may feel more of a pinch as higher costs bite into any leftover savings from pandemic stimulus, Kuhnen said. Elsewhere, the resumption of student loan payments this year likely also caused discontent for those with outstanding dues, according to Karen Dynan, a Harvard professor and former chief economist for the U.S. Treasury Department.
Marissa Lyda moved with her husband and two kids to Phoenix from Portland earlier this year, in part due to lower housing costs. With profits from the value gained on the property she bought in 2019, her family was able to get a nicer house in the Grand Canyon state.
Yet she’s had to contend with an interest rate that’s more than double what she was paying on her old home. Though Arizona’s lower income tax has fattened her family’s wallet, Lyda has found herself allocating a sizable chunk of that money to her rising grocery bill.
The stay-at-home mom has switched her go-to grocer from Kroger to Walmart as value became increasingly important. She’s also found herself searching harder in the aisles for store-brand food and hunting for recipes with fewer ingredients.
Her family’s financial situation certainly doesn’t feel like it reflects the economy she hears experts talking about, Lyda said. It’s more akin to the videos she sees on TikTok and chatter among friends about how inflation is still pinching pocketbooks.
“I look at the news and see how they’re like, ‘Oh, best earnings, there’s been great growth,’” the 29-year-old said. “And I’m like, ‘Where’s that been?’”
Economists wonder if social media discourse and discussion about a potential recession have made Americans think they should feel worse about the economy than they actually do. That would help explain why consumer spending remains strong, despite the fact that people typically tighten their belts when they foresee financial turmoil.
There’s also a feeling of whiplash from the runaway inflation that snapped a long period of low-to-normal price growth, said Harvard’s Dynan. Now, even as the annual rate of inflation has cooled to more acceptable levels, consumers remain on edge as prices continue to creep higher.
“People are still angry about the inflation we saw in 2021 and, in particular, 2022,” Dynan said. “There’s something about the salience of … the bill for lunch that you see every single day that just maybe resonates in your brain, relative to the pay increase you get once a year.”
Federal Reserve Board Chairman Jerome Powell speaks during a press conference following a closed two-day meeting of the Federal Open Market Committee on interest rate policy at the Federal Reserve in Washington, U.S., December 13, 2023.
Kevin Lamarque | Reuters
Another potential problem: The average person may not completely understand that some inflation is considered normal. In fact, the Federal Reserve, which sets U.S. monetary policy, aims for a 2% increase in prices each year. Deflation, which is when prices decrease, is actually seen as bad for the economy.
Despite these quandaries, economists are optimistic for the new year as it appears increasingly likely that a recession has been avoided and the Fed can lower the cost of borrowing money. For everyday Americans like Connolly and Lyda, inflation and their financial standing will remain top of mind.
Lyda has cut treats like weekly Starbucks lattes out of the budget to ensure her family can afford a memorable first holiday season in their new home. In 2024, she’ll be watching to see if the Fed cuts interest rates, potentially creating an opportunity to refinance the loan on that house.
“You just have to realize that every season of life may not be this huge financial season,” Lyda said. “Sometimes you’re in a season where you’re just trying to hold on. And I feel like that’s what it’s been like for most Americans.”
Several Tesla electric vehicles are parked in front of a Tesla service center in the Kearny Mesa region, in San Diego, California, U.S., October 31, 2023.
The investor, who also happens to work in the European auto industry, bought Tesla shares nearly every month in 2023 and has almost doubled the size of his position over the course of the year. Sustic has no other electric vehicle holdings out of a belief that competitors won’t be able to beat Tesla’s technology.
“There is no catching up with them,” said the 32-year-old, who also has two Tesla cars at his home in Croatia. “It’s just a matter of time when the stock will explode.”
Sustic isn’t alone. Tesla, which entered the S&P 500 three years ago this week, is on pace to attract the largest flow of individual investor dollars of any security in 2023, according to data from Vanda Research. The firm calculates net inflows to find these favorites, subtracting the amount of stock sold from what was bought.
That means Tesla will eclipse even the SPDR S&P 500 ETF Trust (SPY), which tracks the largest stock market index in the world. This underscores the stock’s fast ascent to retail-investor glory, especially considering Tesla wasn’t even among the top 20 equities that individual investors bought before 2019, Vanda data shows.
Tesla’s increasing favor among retail traders can be tied to its comeback in 2023, according to Christopher Schwarz, a finance professor at the University of California Irvine. After plunging 65% in 2022, the Elon Musk-led stock has more than doubled in 2023.
The stock has outperformed the market this year in tandem with other mega-cap technology equities dubbed the “Magnificent 7.” Many investors looking to play “disruptive” technology in this elite group have focused on Tesla and chipmaker Nvidia. But after more than tripling this year thanks to an appetite for all things tied to artificial intelligence, Schwarz said Nvidia may be too expensive for many individual investors.
Schwarz researches retail trader behavior, and thinks a lot of attention comes from Musk. The Tesla CEO’s contentious purchase of X, formerly known as Twitter, has brought increased media coverage as well as scrutiny of the billionaire business mogul, Schwarz said.
When faced with thousands of stocks to choose from, Schwarz said individual traders mainly look for names that grab their attention, are familiar and have saliency to current trends. Given Musk’s persona, the growing ubiquity of Teslas on the road and concerns about climate change, Schwarz said Tesla checks many boxes for everyday investors.
“It’s always in people’s minds to trade when they’re looking for something to trade,” Schwarz said.
Individual investors told CNBC that Tesla’s bumpy ride in recent years hasn’t made them doubt the company as much as it’s created opportunities to pick up shares at cheaper prices. To them, there’s little doubt Tesla’s share price will continue to surge.
One of those is Jeremy Ford, a construction contractor in Virginia who first bought Tesla shares as the pandemic took hold in 2020. He became interested when his wife considered — and ultimately ended up — purchasing a Tesla.
The 48-year-old now holds about the same number of Tesla shares as he did when 2023 began, but lowered his cost basis. Given an interest in disruptive technology, Ford reallocated some of those profits to new stakes in Palantir and Nvidia. The latter is tracking to see the fourth largest net inflows this year, while the former is not in the top 20, according to Vanda data.
Elon Musk speaks onstage during The New York Times Dealbook Summit 2023 at Jazz at Lincoln Center on November 29, 2023 in New York City.
Slaven Vlasic | Getty Images
Still, he’s all in on Tesla’s story, citing the push into robots and AI chips as cause for long-term optimism. His only serious concern would be if Musk left and the company’s performance worsened.
“If you can find a company that makes a product that people love, and it’s different than anything that other people have, then you have that chance to really make substantial money,” Ford said. “At some point, I do believe that I’ll look back at the price of the stock now and go, ‘Wow, that was a bargain.’”
Despite Tesla’s strong year on Wall Street and Main Street, others see challenges ahead. Roth MKM analyst Craig Irwin said profit margins could come under pressure from additional price cuts amid cooling growth.
But that may not dent individual investors’ enthusiasm. In fact, Irwin said the stock could be a beneficiary of turbulence in the electric vehicle industry, because any uncertainty would lead investors to companies like Tesla that have proven they can design, make and sell vehicles.
Given their affinity for the brand, Irwin said retail investors may also stick with Tesla longer than institutional investors. That could keep Tesla stock “levitating” above where it would otherwise be priced.
“Retail tends to trade on guts and heart,” Irwin said. “And a lot of people love Tesla.”
Changes in individual investor sentiment are so key to Tesla’s stock performance that hedge funds take note of these trends when evaluating what to do, the analyst noted earlier this year.
Irwin is in the majority on Wall Street in giving Tesla a neutral rating of no more than “hold,” neither recommending it be bought nor sold. Following 2023’s rebound, the average analyst surveyed by LSEG sees the stock falling about 13% over the next year.
Individual investors have often been the butt of the joke, with investing experts pointing to their inability to time the market and best allocate their money.
Yet individual traders have gained attention following the rise of short-squeezed “meme” stocks during the pandemic. Even as that craze fizzled, retail trading remains popular: Everyday investors put more than four times the amount of money into their 20 most-bought securities in 2023 than they did in all of 2018, according to Vanda data from early December.
For Schwarz, the UC professor, the flight to Tesla this year is complicated.
It’s concerning, he said, if individual investors are making bigger bets on single stocks than funds that invest in diversified indexes like the S&P 500 ETF. Still, while investments that spread bets across a pool of stocks is safer, trying to pick certain companies is more desirable than not being in the market at all, he said.
“Traders would be much better off if they just bought [the] index and forgot the password to their brokerage account,” he said. But, “even if Tesla doesn’t do as well as the market, it’s still better than probably just spending it on useless consumption and not participating.”
Maplewood, Minnesota, 3M company global headquarters.
Michael Siluk | Universal Images Group | Getty Images
Check out the companies making headlines in premarket trading.
General Motors — Shares of General Motors rose more than 1% after the automaker raised its full-year guidance and reported second-quarter results that rose on a year-over-year basis.
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3M – Shares of the chemical manufacturer rose about 2% in premarket trading following the company’s latest earnings report. 3M posted $7.99 billion in revenue, beating analysts’ estimates of $7.87 billion, according to Refinitiv. The company also raised its full-year earnings guidance and reaffirmed its revenue guidance.
Xerox — The workplace technology provider advanced 3.6% after beating earnings expectations for the second quarter, posting 44 cents per share excluding items against a 32-cent forecast from analysts polled by FactSet. Quarterly revenue came in line with expectations at $1.75 billion. Xerox also said to expect free cash flow and the adjusted operating margin to be better than previously anticipated for the full year.
General Electric — Shares of the industrial giant jumped more than 4% in premarket trading after the company posted stronger-than-expected earnings for the second quarter. GE also boosted its full-year profit guidance on the back of strong demand from aerospace and record orders in its renewable energy business.
Danaher — Shares of the conglomerate slid 4.6%. Danaher said non-GAAP core revenue in the base business will be down in the current quarter compared with the same quarter a year ago and would be up less than previously expected for the full year. However, the company gave a strong quarterly report, posting second quarter earnings per share excluding items at $2.05 and revenue at $7.16 billion, while analysts polled by FactSet anticipated $2.01 per share on $7.12 billion in revenue.
Spotify — The music streaming platform dropped 6.1% after presenting a weak quarterly report and guidance. Spotify reported revenue of €3.18 billion, below a Refinitiv forecast of €3.21 billion. Full-year revenue guidance was also worse than analysts expected. The report follows Spotify’s announcement that it will raise prices for premium subscription plans.
Lilium — The electric helicopter stock added 5.6% after management released a letter to shareholders. In the letter, management said adjusted cash spend for the first half of 2023 was within budget and the company was successful in an audit from the European Union Aviation Safety Agency.
Alaska Air — Shares of the airline fell more than 4% even after Alaska beat estimates on the top and bottom lines for the second quarter. Alaska reported $3 in adjusted earnings per share on $2.84 billion in revenue. Analysts surveyed by Refinitiv were expecting $2.70 in earnings per share on $2.77 billion in revenue. The airline’s full-year earnings guidance of $5.50 to $7.50 per share was roughly in-line with the average analyst estimates of $6.65, according to FactSet.
RTX — Shares of the company formerly known as Raytheon slipped 3% despite a strong quarterly report. RTX ported $1.29 in earnings per share, excluding items, on $18.32 billion in revenue. Analysts polled by Refinitiv forecasted $1.18 per share and $17.68 billion. The company also raised its full-year expectations for both lines.
Verizon — The telecommunications giant traded 2.6% higher after reaffirming its full-year guidance. That came despite a mixed second quarter, with Verizon posting $1.21 in earnings per share, excluding items, on $32.6 billion in revenue. Analysts polled by Refinitiv estimated $1.17 earnings per share and revenue of $33.24 billion.
Walmart — Walmart rose more than 1% after Piper Sandler upgraded the big-box retailer Monday to overweight from neutral, and hiked its price target. Analyst Edward Yruma said Walmart could take greater market share in the grocery business as inflation eases.
— CNBC’s Samantha Subin, Yun Li, Jesse Pound, Sarah Min and Tanaya Macheel contributed reporting
The first Barbie Doll from 1959 is displayed at the interactive exhibition “The World of Barbie” on June 28, 2023, at Santa Monica Place in Santa Monica, California.
Robyn Beck | Afp | Getty Images
A weapons engineer turned doll maker is the unexpected link to “Barbenheimer,” the affectionately dubbed duo from Warner Bros.′ “Barbie” and Universal’s “Oppenheimer.”
The unlikely back-to-back summer marquee titles opened Friday following weeks of mania harping on the dissimilarities of the two films — the whimsical and rosy world of “Barbie” alongside “Oppenheimer,” the extraordinary story of the American physicist who brought the world into the atomic age.
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And yet, the Barbie doll comes from a weapons background.
Before designing the world’s most famous doll, Jack Ryan worked for aerospace giant Raytheon and helped create the weapons that formed the backbone of America’s missile defense.
Ryan, a Yale-educated engineer, helped create the Sparrow and Hawk missiles, which laid the groundwork for the Patriot missile system, one of the most advanced air defense weapons in America’s arsenal.
Following his work in the arms business, Ryan went to Mattel, where he ascended to vice president of research and design for the toy manufacturer.
On July 24, 1959, Ryan filed a U.S. patent detailing his concept for what would later become the world’s most recognizable toy doll. Ryan was granted the patent for “doll construction” in November 1961. He is also credited with creating toys like Chatty Cathy and the Hot Wheels collection.
The patent for the first Barbie ever produced from the collection of Sid and Alicia Belzberg.
James Leynse | Corbis Historical | Getty Images
Before his death in 1991 at the age of 65, Ryan had accumulated more than 1,000 patents on his designs.
Meanwhile, movie theaters are indicating strong ticket sales for “Barbie” and “Oppenheimer” and have been adding additional showings to accommodate growing demand.
“Barbie” has already tallied $22.3 million at the domestic box office from Thursday night previews, on its way to at least $140 million for the full weekend. “Oppenheimer” snared $10.5 million Thursday, looking at $60 million for the weekend.
What’s more, the two films together are likely to generate more than $200 million over the next few days and are expected to lead to the highest-grossing weekend of the year so far at the box office, with some analysts suggesting the weekend could top $300 million with additional sales from “Mission Impossible,” “Sound of Freedom” and “Spider-Man: Across the Spider-Verse.”
Disclosure: Comcast is the parent company of NBCUniversal and CNBC.
The flurry of unidentified objects that have been shot down over North America this month could bring yet another boost to aerospace and defense stocks, but investors looking to use ETFs should be aware of some key differences between the largest funds. The U.S. shot down a fourth unidentified object on Sunday, as the administration takes a more aggressive stance after a suspected spy balloon from China flew across much of the country during the first days of February. These events are heightening tensions with China and, in turn, easing some fear among investors that the looming debt ceiling fight in Washington will damage the outlook for defense contractors working hand-in-hand with the military. “These incidents raise the likelihood, in our view, defense spending will not be cut, and perhaps be increased,” Roman Schweizer, analyst at Cowen, said in a note to clients on Sunday. Credit Suisse analyst Scott Deuschle, who upgraded the investment outlook for the defense sector to positive on Feb. 6, agreed with that position in a note to clients on Monday. “We believe these events are likely to reduce the willingness of Congress to use the DoD budget for political purposes, and instead drive consensus toward continued budgetary support. Specifically, we highlight that geopolitical tension/anxiety has historically been the driving force behind past defense budget trends, and we expect this time to be no different,” Deuschle said. While defense stocks have outperformed the broader market over the past year, in part due to the war in Ukraine, the latest shoot downs don’t appear to have significantly moved the sector. The three major ETFs in the industry had an average price return of less than 1% last week, albeit in a week when the broader averages declined. Here’s a look at the key differences among these ETFs. The biggest fund on the market is the iShares U.S. Aerospace & Defense ETF (ITA) , with about $5 billion in assets under management. The fund is competitively priced, with an expense ratio of 0.39%, and is weighted by market cap. The fund also hit its highest level since Feb. 2020 on Monday morning. One potential drawback is that the fund is heavily concentrated in just a few stocks. The top five holdings account for more than 50% of the fund, with Raytheon Technologies alone accounting for more than 20%. This means that a company-specific issue at Raytheon could lead the fund to suffer, even if the industry as a whole performs well. Another market-cap weighted fund is the Invesco Aerospace & Defense ETF (PPA) . One key difference for the Invesco fund is that it limits the size of any one stock in the portfolio to 10% at the time of rebalancing. The fund currently has no stock with more than a 10% weight in the portfolio, according to FactSet. The Invesco fund also has more stocks in its portfolio, including truck manufacturer Oshkosh Corp. and industrial company Ball Corp. That greater diversity in the fund does come with a higher price tag, however, as the Invesco ETF has an expense ratio of 0.58%. The third fund on the market is the SPDR S & P Aerospace & Defense ETF (XAR) . This ETF is equal weighted, with no single stock taking up even 5% of the portfolio. While the equal weighted fund does avoid some of the company-specific risks of a more concentrated portfolio, it also gives investors greater exposure to smaller companies that could be heavily reliant on a small number of government contracts. The SPDR fund, with an expense ratio of 0.35%, has the best total return of the group so far this year, at 7.15% — CNBC’s Michael Bloom contributed to this report.
