ETFs are a smart means of gaining focused exposure to industrial sectors, and now may be a good time to take a look at some of the best ETFs that buy defense stocks.
Not to be confused with defensive stocks, defense stocks are equities of firms within the defense industry, which consists of government and business entities that are involved in the production, service and support of military operations, equipment and facilities.
With regard to escalating conflicts around the world today, and the likelihood that the next U.S. president will be more hawkish than the present one, an increase in defense spending in the short or intermediate term is a very real possibility.
So if you love defense stocks, or if you are looking for a potential sector play, here are three of the best ETFs to consider.
Best ETFs for Defense Stocks: iShares US Aerospace & Defense (ITA)
Expenses: 0.43%, or $43 for every $10,000 invested
Investors looking for a large, liquid and highly rated defense stock fund will want to take a close look at iShares US Aerospace & Defense (ITA).
ITA is a popular choice among investors, and the ETF boasts a five-star rating. The portfolio seeks to track the Dow Jones U.S. Select Aerospace & Defense Index, which includes U.S. companies that manufacture commercial and military aircrafts and other defense equipment.
Most of the holdings for ITA are large-cap industrial stocks like Boeing (BA), United Technologies (UTX), and Lockheed Martin (LMT).
ITA is also a top performer, outperforming 99% of other funds in the industrials sector for 3- and 5-year returns. For short-term reference in relation to the broader stock market, ITA has a 5% price gain in the past month, compared to 2.7% on the S&P 500.
Best ETFs for Defense Stocks: SPDR S&P Aerospace and Defense (XAR)
Expenses: 0.35%, or $35 for every $10,000 invested
The best ETFs are often those with the lowest expenses compared to similar funds. For this reason, investors should take a close look at SPDR S&P Aerospace and Defense (XAR).
Beyond being the cheapest ETF in the defense stock category, XAR has an equal-weight indexing approach in its tracking of the S&P Aerospace and Defense Select Industry Index. This allocation weighting and benchmark provides greater relative exposure to small- and mid-cap stocks, which makes XAR a bit more aggressive compared to large-cap ETFs.
The different approach results in greater exposure to a cross-section of aerospace and defense stocks like L-3 Communications (LLL), Raytheon (RTN), and Huntington Ingalls Industries (HII).
Best ETFs for Defense Stocks: Powershares Aerospace and Defense (PPA)
Expenses: 0.66%, or $66 for every $10,000 invested
Among the best ETFs for defense stocks, the one with the longest track record is Powershares Aerospace and Defense (PPA).
Despite the higher expense ratio, PPA performs well and ranks high in the industrials category for short-term and long-term returns. Year-to-date, PPA is up 5%, which beats more than 90% of category peers. The 10-year annualized return of 10% beats 99% of the category.
PPA tracks the SPADE Defense Index, which represents a group of “companies involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations,” according to Invesco. “The Fund will normally invest at least 90% of its total assets in common stocks that comprise the Index.”
This indexing style of PPA results in higher allocation to its top holdings, which includes Boeing, United Technologies, and Honeywell (HON).
To summarize our highlights on three of the best ETFs for defense stocks, investors wanting to add exposure to niche industries are wise to allocate small portions, such as 5%, to a broader, diversified portfolio.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.
