A:

Exchange-traded funds (ETFs) are popular with investors who want a reduced-risk means of investing in a sector. ETFs lower risk by spreading investment across many different companies within the same industry. Return rates generally track average returns across the sector. Many aerospace-based funds are available, including the SPDR S&P Aerospace and Defense (XAR) and iShares US Aerospace and Defense (ITA). As of 2014, the year-to-date value of both of these funds increased by over 50 percent. Both are very popular with investors seeking solid returns and risk management.

Another popular fund is the Aerospace & Defense Profile (PPA) ETF. In 2014, this fund tracked 51 different securities, with Boeing Co., Lockheed Martin and Honeywell International the top three securities held in the fund.

XAR follows the S&P index's aerospace and defense companies and is one of 19 sector funds that have the S&P Select Industry Indices classification. Over 99 percent of XAR's companies are within the United States, but a small number of foreign companies are included. The fund had 39 securities in 2014, with Spirit AeroSystems Holdings Class A, Alliant Techsystems and Boeing Co. being the top three.

ITA holds securities listed in the Dow Jones US Aerospace & Defense Index. As of 2014, this ETF held 39 securities with over half heavily concentrated in the fund. The top three holdings are Boeing Co., United Technologies and Precision Castparts.

PPA holds 51 securities and tracks the SPADE Defense Index. This index identifies the businesses that support and maintain U.S. defense, the aerospace industry and homeland security operations.

The aerospace industry as a whole experiences supply chain issues, is influenced heavily by defense spending and is heavily concentrated within the United States. These potential risks are not completely mitigated by investing in ETFs, so investors should be aware of the challenges facing the aerospace industry as a whole and the impact these challenges may have on aerospace sector ETFs.

When demand for new aircraft is high, competition makes repairing supply chain problems and increasing production efficiency more important. The aerospace industry is heavily influenced by government and defense spending. Defense purchasing means governments are often the biggest clients and have substantial leverage in contracts. Changes in government spending are immediately felt by aerospace companies. Austerity measures resulting in smaller defense budgets may dramatically impact product research and development and change product lines. Since commercial investment also plays an important role, aerospace companies must manage a broad client base with diverse product needs. Commercial clients grow in importance when demand for air travel is strong.

ETFs offer a popular method of investing in the aerospace industry and may bring substantial returns to investors who are mindful of the investing risks.

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What are the most popular ETFs that track the aerospace sector?