Defense stocks have been rallying since the election on hopes of a big boost in military spending. In his address to the Congress, President trump said that his upcoming budget would seek “one of the largest increases in national defense spending in American history.” The budget is expected to be released later this month.
Trump is also expected to put pressure on other NATO member nations to step up defense spending. He has also said that China could easily tackle the nuclear threat from North Korea if they wanted to, thus putting pressure on China.
And, North Korea continues to pursue nuclear development, escalating geopolitical tensions in the region. Earlier this week, they fired four ballistic missiles, leading to the deployment of parts of the antimissile system, called Terminal High-Altitude Area Defense, or Thaad, on Tuesday by the US.
The sentiment for Aerospace & Defense stocks improves with rising geopolitical tensions. That is one of main reasons why these stocks performed well in the last few years, despite defense budget cuts in the US and Europe.
Many developing countries including India, UAE, Saudi Arabia and Brazil increased their defense spending over the past few years. Of late, Japan and South Korea have also boosted their defense spending in response to increased military spending by China. (Read: 5 ETFs to Buy in March)
Also, many defense companies boosted their R&D spending to come up with next generation technology products in areas with huge growth potential such as intelligence and surveillance.
Aerospace & Defense Industry is currently ranked 102 out of 265 Zacks Industries (top 38%). Most companies in the group reported better-than-expected earnings for Q4, sending the industry up more than 7% year-to date.
Let’s take a look at our list of ETFs:
PowerShares Aerospace & Defense (ETF) (PPA)
PowerShares Aerospace & Defense (ETF) (PPA) is based on the SPADE Defense Index, a market cap weighted index that tracks companies involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations. It is the oldest product in the space. (Read: Healthcare ETFs in Focus on Obamacare Replacement Plan)
The product has managed to garner $528 million in assets so far, which are currently invested in 50 securities. It charges 64 basis points in expenses. Boeing Co (BA), General Dynamics Corporation (GD) and Honeywell International Inc (HON) are the top three holdings.
PPA is a Zacks Rank#1 (Strong Buy) ETF.
iShares Dow Jones US Aerospace & Defense ETF (ITA)
iShares Dow Jones US Aerospace & Defense ETF (ITA) which made its debut in May 2006 is currently the largest ETF in the space with $2.6 billion in assets. It charges annual fee of 44 basis points. It is a market cap weighted ETF.
The fund holds 39 securities in its basket with Boeing, United Technologies Corporation (UTX), and Lockheed Martin Corporation (LMT) being the top holdings. ITA is a Zacks Rank#1 (Strong Buy) ETF. (Read: Time to Buy Gold ETFs on the Dip?)
SPDR S&P Aerospace & Defense ETF (XAR)
Launched in September 2011, SPDR S&P Aerospace & Defense ETF (XAR) tracks S&P Aerospace and Defense Select Industry index, which is a modified equal weight index. Due to equal-weighting, this product has low company specific risk.
This fund has attracted AUM of $526 million so far. It holds 38 and charges 35 basis points in expenses.
XAR is a Zacks Rank#1 (Strong Buy) ETF.
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