Dow Jones Industrial Average component Boeing Co. (NYSE:BA), the largest U.S. aerospace and defense company, has taken some lumps this year, induced by the grounding of the 737 Max passenger jet. However, defense stocks as a whole are still performing well.
For its part, Boeing is up 17.53% year-to-date while the widely followed Dow Jones U.S. Select Aerospace & Defense Index, a broader gauge of defense stocks, is higher by more than 21%. When defense stocks are performing well, as they have for several years, increased spending is usually one of the catalysts.
“Global military expenditure reached its highest level last year since the end of the Cold War, fueled by increased spending in the United States and China, the world’s two biggest economies,” reports Reuters, citing the Stockholm International Peace Research Institute (SIPRI).
For investors that want to participate in the rally in defense stocks without having to stock pick in the group, here are some aerospace and defense exchange-traded funds (ETFs) to consider.
iShares U.S. Aerospace & Defense ETF (ITA)
Expense ratio: 0.43% per year, or $43 on a $10,000 investment
The iShares U.S. Aerospace & Defense ETF (CBOE:ITA) is the largest ETF dedicated to defense stocks and tracks the aforementioned Dow Jones U.S. Select Aerospace & Defense Index. ITA is a cap-weighted fund and is home to 34 defense stocks, including an almost 20% weight to Boeing. Shares of United Technologies Inc. (NYSE:UTX), another Dow stock, command 18.26% of ITA’s weight. In other words, this is a top-heavy fund of defense stocks.
ITA’s top-heavy ways can be a benefit to investors when the U.S. is spending big on defense, something Uncle Sam has regularly done since Donald Trump became the 45th U.S. president.
“U.S. military spending rose 4.6 percent last year to reach $649 billion, leaving it still by far the world’s biggest spender,” according to Reuters. “It accounted for 36 percent of total global military expenditure, nearly equal to the following eight biggest-spending countries combined, SIPRI said.”
With another election year right around the corner, expect politicians to consider upping defense spending, which should up share prices of domestic defense stocks along the way.
Procure Space ETF (UFO)
Expense ratio: 0.75%
The Procure Space ETF (NYSEARCA:UFO) is the newest of the ETFs to be highlighted here, having debuted just three weeks ago. UFO tracks the S-Network Space Index.
“Approximately 80 percent of companies in the index derive the majority of revenues directly from their involvement in the space industry, enabling investors to potentially capture this growing segment of the global economy,” according to ETF Trends.
Not all of UFO’s 30 holdings are defense stocks, but the new space ETF features ample aerospace and defense exposure. At least a third of the fund’s holdings can be considered defense stocks, including Boeing and Raytheon Inc. (NYSE:RTN). Plus, investors choosing UFO as an avenue to defense stocks get the space industry growth kicker.
As the issuer notes, decreasing costs are making space tourism more accessible and the creation of the U.S. Space Force brings significant government spending into the equation.
SPDR S&P Aerospace & Defense ETF (XAR)
Expense ratio: 0.35%
The SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR) is an equal-weight collection of defense stocks that targets the S&P Aerospace & Defense Select Industry Index.
The $1.34 billion XAR “seeks to provide exposure to the Aerospace & Defense segment of the S&P TMI, which comprises the following sub-industries: Aerospace & Defense,” according to State Street.
As an equal-weight fund, none of the 31 defense stocks in XAR command more than 4.98% of the ETF’s weight and that diminishes the fund’s concentration risk. However, XAR’s equal-weight methodology does not diminish the fund’s potency as highlighted by a year-to-date return of more than 22%.
ETFMG Drone Economy Strategy ETF (IFLY)
Expense ratio: 0.75%
Drone makers have been among the hottest names in the defense stocks space. Adding to the allure of drone makers is that many of these companies are mid caps or on the smaller side of large-cap territory. The ETFMG Drone Economy Strategy ETF (NYSEARCA:IFLY) is the first ETF dedicated to this segment of defense stocks. IFLY tracks the Reality Shares Drone Index and holds 53 stocks.
IFLY certainly fits the bill as a thematic ETF, but the drone theme is credible and powered by legitimate growth expectations.
“Over the next five years, the US government is expected to increase spending on drones, in conjunction with the growing civilian commercial market,” according to IFLY’s issuer. “As more companies employ drone technology, as recreational demand expands significantly, and as innovation drives progress, IFLY stands to potentially benefit from market exposure to the drone industry.”
This unique play on defense stocks is up 20.20% year-to-date.
SPDR Kensho Future Security ETF (XKFS)
Expense ratio: 0.46%
The SPDR Kensho Future Security ETF (NYSEARCA:XKFS) is another unique, futuristic approach to defense, though like some of the ETFs mentioned here, XKFS is not entirely dedicated to defense stocks. Do not argue with the performance, though, as this fund is up 26.52% year-to-date.
XKFS tracks the S&P Kensho Future Security Index. That benchmark is “designed to capture companies whose products and services are driving innovation behind future security, which includes the areas of cybersecurity, advanced border security and the following areas for military application: robotics, drones and drone technologies, space technology, wearable technologies and virtual or augmented reality activities,” according to State Street.
While XKFS is not dedicated to defense stocks, aerospace and defense names represent nearly a third of the fund’s holdings. This fund has a weighted average market value of $21.88 billion, indicating it has some small- and mid-cap exposure to defense stocks.
Additionally, XKFS overs some leverage to fast-growing, non-defense themes, including cybersecurity, robotics and artificial intelligence.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
