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Investors considering the aerospace sector should carefully consider the challenges and opportunities the industry presents. Aerospace companies are very closely linked to the defense sector and experience many of the same challenges. Many investors choose to reduce risk by spreading their investment across multiple companies with an ETF investment.

These funds are heavily concentrated in the United States. Many American aerospace companies depend on government contracts and are vulnerable to cuts in government spending. As industry competition increases, reducing supply chain costs becomes more important and more difficult to accomplish. Due to the sensitive nature of defense operations and aerospace competition, mergers and acquisitions are difficult and costly. The usual means of reducing corporate costs are more challenging for the aerospace industry than many other sectors. Investors should note that cost containment is an ongoing issue for many companies.

Growing airline demand around the world for new aircraft is helping the aerospace industry grow. Investors may benefit tremendously from this demand increase caused by growing airlines and air traffic. This increase also has aerospace companies identifying and repairing supply chain problems before they threaten aircraft production. Fixing the problems caused by rapid growth is not easy for the industry and may pose problems for the industry's investors.

Individual aircraft models may almost individually drive demand as airlines rush to order new products. This rush may leave the industry vulnerable to changes in defense funding, as many of the same supplies serve both the defense and private sides of the industry. Defense departments are powerful buyers that have significant leverage and often control suppliers. If commercial demand levels differ strongly from defense demand, then the aerospace industry may be pulled in conflicting directions by major clients.

High demand for aerospace products may be both a blessing and a curse. Commercial airlines have a high passenger load, averaging 80 percent of available seats in 2013. Purchasing new aircraft creates backlogged orders when the supply chain forces down aircraft supply in the economy.

Investors should be aware of the influence emerging market economies and strong economic performance have on aerospace companies' ability to meet the demand for new aircraft. Over time, higher demand for new aircraft may substantially raise consumer pricing and increase consumer spending on air transportation as a result. This positive news for airlines may pose new challenges for aerospace companies. Increased competition may push some products out of the market, and aerospace companies often invest substantially in a small product line. If one or two products lose popularity, then the company may sustain a significant loss.

In spite of these risks, many investors find airlines attractive as more passengers around the world are able to afford air travel. The growth of new global markets increases interest in this sector.

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What are common risks associated with investing in the aerospace sector?