Self Directed Investor Inc
SDI: "Empowering investors with ideas and education"
Symbol Lookup »  
Topics:ChinaETFsEarningsEconomyEnergyForexGoldIncomeLessonsIdeasTrading

  • Other news: News from PR Newswire
| More

Can Defense ETFs Survive A Spending Slowdown?

Wed, Sep 14, 9:54 AM ET, by Michael Johnston

Over the past few months, one of the key issues that has been facing the U.S. is the enormous budget deficit and how best to get this debt under control. The U.S. has already lost its prized ‘AAA’ credit rating according to S&P and it appears that others may follow if more steps aren’t taken to reign in spending. Thanks to this, a legislative ‘supercommittee’ has been set up in order to find ways to cut spending, while at the same time, allowing the nation to grow. The task is pretty immense as the 12 person group is supposed to somehow agree on an additional $1.5 trillion in savings over a ten year period, not an easy find given how deadlocked and partisan our Congress has become.

Nonetheless, one of the first places that lawmakers will probably look at will be in the Defense Department. “”Overall defense spending accounts for 20% of the entire federal budget. Last year, the Pentagon spent $530 billion, without even counting war costs” writes Charles Riley of CNN Money. “Already, the debt ceiling deal struck by the nation’s top lawmakers includes $350 billion in cuts to the defense budget over the next decade,” so further cuts cannot be ruled out for this enormous industry, especially considering how unlikely cuts to entitlement programs are in the current weak economic environment.

Furthermore, defense spending as a percentage of GDP is well above many other developed nations around the world by a large margin. The U.S. spends nearly twice as much as a percentage of GDP as France and the UK, while it spends close to four times as much as Germany and Japan. In terms of overall dollars, no other nation even comes close; the U.S. spends close to six times more than China and almost as much as every other nation on Earth, combined [read Rare Earth Metal Shortage Could Sink These Three ETFs].

Given how lopsided the spending is in the U.S., many are likely to go along with a cut in defense spending, especially if the only other alternative is a cut in medicare or social security. Indeed, beyond entitlement programs, defense is the single largest expenditure for the government, and since it isn’t quite as much of a political hot-button issue, some look to the sector as one for huge cuts. In fact, according to a recent report, the top five defense contractors raked in revenues of close to $40 billion in 2009 from the government, making for an easy target for many politicians seeking to appeal to ‘Main Street’ ahead of next year’s elections.

Not So Fast!

Yet, before harsh cuts can take the sector down a peg, a number of roadblocks will have to be dealt with. First and foremost is the loss of jobs that a large cut in defense spending would necessatate. Defense is one of the few industries that is still on American shores so a large reduction in government spending in this area could crush this corner of the manufacturing base, leaving many factory workers unemployed. This could be poltically difficult to deal with given the current employment situation and could force some to take another look at other areas of the budget [see The Next Frontier For Aerospace and Defense ETFs].

Secondly, and just as important, the U.S. remains engaged in a number of conflicts around the globe so a cut in spending could not be welcomed news by those seeking replacements for parts or new high tech weapons for the battles. In essence, a large amount of the spending seems necessary if the U.S. wants to continue to have an interventionist foreign policy. Given the forays into nations such as Libya in recent months, this doesn’t exactly seem too far fetched. Furthermore, as Army Gen. Marin Dempsey said recently, "national security didn't cause the debt crisis nor will it solve it."

Ways To Play

No matter what happens, the defense industry will be one to watch over the next few months, and especially so as the budget crisis unfolds. If deep cuts hit the industry hard, firms are likely to see stock prices crater, and they could remain depressed if it appears to be a long-term shift instead of a short-term budget reshuffling. On the other hand, if the industry is able to skirt by relatively unscathed, investors could breathe a sigh of relief and resuming buying the sector in droves, making now an ideal time to purchase firms in the aerospace and defense industry.

For investors looking to achieve broad exposure to the sector, there are currently two choices that could make for great ways to play the industry long or short. While both funds offer similar holdings and strategies there are a few key differences that investors need to be aware of before making a choice between the two [also try out our free compare tool to analyze any two ETFs head-to-head]:

  • iShares Dow Jones U.S. Aerospace & Defense Index Fund (ITA)- This iShares product is slightly cheaper, and more popular, than its PowerShares cousin, charging investors .48% a year in fees. The fund holds 33 securities in total and gives heavy weightings to United Technology Group, Boeing, and Precision Castparts. Year-to-date the fund has lost about 8.5% but has gained about 3.6% over the past 52 weeks. However, investors should also note that the fund has a slightly higher beta and PE suggesting it may be more of a growth-oriented product [see returns of ITA here].
  • PowerShares Aerospace & Defense Fund (PPA)- Although PPA might be more expensive, the fund does offer a wider base of exposure, giving investors access to more than 50 companies in total. PPA’s top holdings are flipped from ITA, giving the top spot to Boeing and the following it up with UTX. In third, Honeywell makes an appearance, a fund that doesn’t even receive inclusion in ITA’s top ten holdings. PPA’s return so far in 2011 hasn’t been great, as the fund has fallen by about 12.3% since the start of January. Longer term isn’t much better as the product is down for both the recent one and three year periods as well. With that being said, the fund does offer a lower PE by nearly two and has a standard deviation that is less than half of ITA, suggesting it could be a less volatile pick in these rocky markets [see technicals of PPA here].

[For more ETF ideas sign up for our free ETF newsletter.]

Disclosure: Long ITA.


SDI Glossary: "price" Definition
SDI Glossary: "ETFs" Definition
SDI Glossary: "GDP" Definition
SDI Glossary: "iShares" Definition
SDI Glossary: "Money" Definition
SDI Glossary: "Short" Definition
SDI Glossary: "TA" Definition
This Article's Word Cloud:   Aerospace   Boeing   Defense   ETFs   about   appears   been   billion   both   budget   close   could   cuts   debt   defense   especially   even   fund   government   holdings   industry   investors   large   look   making   many   months   more   much   nation   next   offer   other   over   product   programs   recent   said   sector   spending   spends   term   than   that   this   time   total   will   with   year

| More

FXU Crowded With Sellers
Fri, Aug 26, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the First Trust Utilities AlphaDEX Fund ETF (FXU) entered ...

Guggenheim S&P 500 Equal Weight Utilities Getting Very Oversold
Fri, Aug 26, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the Guggenheim S&P 500 Equal Weight Utilities ETF (RYU) ...

iShares MSCI Frontier 100 Getting Very Oversold
Fri, Aug 26, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the iShares MSCI Frontier 100 ETF (FM) entered into ...

Shares of VOX Now Oversold
Fri, Aug 26, 4:14 PM ET, by ETF Channel

In trading on Friday, shares of the Vanguard Telecommunication Services ETF (VOX) entered into oversold ...

Alphabet Takes Over #13 Spot From American Tower
Fri, Aug 26, 11:54 AM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

DUST: Large Outflows Detected at ETF
Fri, Aug 26, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: DUST Exchange traded funds (ETFs) trade just like stocks, but ...

EWM Makes Bullish Cross Above Critical Moving Average
Fri, Aug 26, 10:54 AM ET, by ETF Channel

In trading on Friday, shares of the iShares MSCI Malaysia ETF (EWM) crossed above their ...

XLK, ACN, AVGO, EMC: Large Inflows Detected at ETF
Fri, Aug 26, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: XLK, ACN, AVGO, EMC Exchange traded funds (ETFs) trade just ...

GUESS ? Reaches Analyst Target Price
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of GUESS ?, Inc. (GES) have crossed above the average analyst ...

CLI Crosses Above Average Analyst Target
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of Mack Cali Realty Corp (CLI) have crossed above the average ...

CTL Crosses Above Average Analyst Target
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of CenturyLink, Inc. (CTL) have crossed above the average analyst 12-month ...

BURL Crosses Above Average Analyst Target
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of Burlington Stores Inc (BURL) have crossed above the average analyst ...

Welltower Reaches Analyst Target Price
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of Welltower Inc (HCN) have crossed above the average analyst 12-month ...

HURN Crosses Above Average Analyst Target
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of Huron Consulting Group Inc (HURN) have crossed above the average ...

Craft Brew Alliance Reaches Analyst Target Price
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of Craft Brew Alliance Inc (BREW) have crossed above the average ...

Exa Reaches Analyst Target Price
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of Exa Corp (EXA) have crossed above the average analyst 12-month ...

KTOS Crosses Above Average Analyst Target
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of Kratos Defense & Security Solutions, Inc. (KTOS) have crossed above ...

PVTB Crosses Above Average Analyst Target
Fri, Aug 26, 8:14 AM ET, by ETF Channel

In recent trading, shares of PrivateBancorp Inc (PVTB) have crossed above the average analyst 12-month ...

iShares Nasdaq Biotechnology Breaks Below 200-Day Moving Average - Notable for IBB
Thu, Aug 25, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares Nasdaq Biotechnology ETF (IBB) crossed below their ...

IHF Makes Notable Cross Below Critical Moving Average
Thu, Aug 25, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the iShares U.S. Healthcare Providers ETF (IHF) crossed below ...

Vertex Pharmaceuticals Takes Over #81 Spot From Starbucks
Thu, Aug 25, 1:34 PM ET, by ETF Channel

In a study of analyst recommendations at the major brokerages, for the underlying components of ...

PUI, SCG, WEC, SRE: Large Outflows Detected at ETF
Thu, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: PUI, SCG, WEC, SRE Exchange traded funds (ETFs) trade just ...

iShares MSCI Italy Capped ETF Experiences Big Outflow
Thu, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: EWI Exchange traded funds (ETFs) trade just like stocks, but ...

IVE, T, PG, CSCO: Large Outflows Detected at ETF
Thu, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IVE, T, PG, CSCO Exchange traded funds (ETFs) trade just ...

SVXY: ETF Outflow Alert
Thu, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: SVXY Exchange traded funds (ETFs) trade just like stocks, but ...

EBND: ETF Outflow Alert
Thu, Aug 25, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: EBND Exchange traded funds (ETFs) trade just like stocks, but ...

VEA: Large Inflows Detected at ETF
Thu, Aug 25, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VEA Exchange traded funds (ETFs) trade just like stocks, but ...

NOBL, CTAS, HRL, GWW: ETF Inflow Alert
Thu, Aug 25, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: NOBL, CTAS, HRL, GWW Exchange traded funds (ETFs) trade just ...

TZA: ETF Inflow Alert
Thu, Aug 25, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: TZA Exchange traded funds (ETFs) trade just like stocks, but ...

Vanguard Mid-Cap Value ETF Experiences Big Inflow
Thu, Aug 25, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: VOE Exchange traded funds (ETFs) trade just like stocks, but ...

UVXY: Large Inflows Detected at ETF
Thu, Aug 25, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: UVXY Exchange traded funds (ETFs) trade just like stocks, but ...

XHS, ABC, WOOF, MOH: ETF Inflow Alert
Thu, Aug 25, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: XHS, ABC, WOOF, MOH Exchange traded funds (ETFs) trade just ...

SQQQ: ETF Inflow Alert
Thu, Aug 25, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: SQQQ Exchange traded funds (ETFs) trade just like stocks, but ...

The DO Paradox: Analysts Bearish But Forecast 12.1% Gains
Thu, Aug 25, 8:14 AM ET, by ETF Channel

Analyst ratings can sometimes be complicated, and we here at ETF Channel have noticed a ...

The ESV Paradox: Analysts Bearish But Forecast 14.25% Gains
Thu, Aug 25, 8:14 AM ET, by ETF Channel

Analyst ratings can sometimes be complicated, and we here at ETF Channel have noticed a ...

KFRC Crosses Above Average Analyst Target
Thu, Aug 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Kforce Inc. (KFRC) have crossed above the average analyst 12-month ...

BMA Crosses Above Average Analyst Target
Thu, Aug 25, 8:14 AM ET, by ETF Channel

In recent trading, shares of Banco Macro S.A. (BMA) have crossed above the average analyst ...

Sum Up The Parts: IBB Could Be Worth $366
Thu, Aug 25, 8:14 AM ET, by ETF Channel

Looking at the underlying holdings of the ETFs in our coverage universe at ETF Channel, ...

GDX Crowded With Sellers
Wed, Aug 24, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Gold Miners ETF (GDX) entered into oversold territory, ...

ProShares Ultra Gold Miners Getting Very Oversold
Wed, Aug 24, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the ProShares Ultra Gold Miners ETF (GDXX) entered into ...

iShares MSCI Global Gold Miners Getting Very Oversold
Wed, Aug 24, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Global Gold Miners ETF (RING) entered ...

NUGT Crosses Critical Technical Indicator
Wed, Aug 24, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Daily Gold Miners Index Bull 3x Shares ETF ...

Notable Two Hundred Day Moving Average Cross - BIB
Wed, Aug 24, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the ProShares Ultra Nasdaq Biotechnology ETF (BIB) crossed below ...

Pharmaceutical (PPH) Shares Cross Below 200 DMA
Wed, Aug 24, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Pharmaceutical ETF (PPH) crossed below their 200 day ...

See How International Business Machines Ranks Among Analysts' Top Dow 30 Picks
Wed, Aug 24, 11:54 AM ET, by ETF Channel

A study of analyst recommendations at the major brokerages shows that International Business Machines Corp. ...

MDY, MTD, IDXX, WWAV: Large Outflows Detected at ETF
Wed, Aug 24, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: MDY, MTD, IDXX, WWAV Exchange traded funds (ETFs) trade just ...

FM Crosses Below Key Moving Average Level
Wed, Aug 24, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Frontier 100 ETF (FM) crossed below ...

PSK, HSEB, PNC.PRP, USB.PRM: Large Outflows Detected at ETF
Wed, Aug 24, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: PSK, HSEB, PNC.PRP, USB.PRM Exchange traded funds (ETFs) trade just ...

RXI, MCD, TWX, TJX: ETF Inflow Alert
Wed, Aug 24, 10:54 AM ET, by ETF Channel

Symbols mentioned in this story: RXI, MCD, TWX, TJX Exchange traded funds (ETFs) trade just ...

AGQ Crowded With Sellers
Wed, Aug 24, 10:54 AM ET, by ETF Channel

In trading on Wednesday, shares of the ProShares Ultra Silver ETF (AGQ) entered into oversold ...

  More articles:  1 2 3 4 5 6 7 next »

ABOUT US »   ADVERTISE »   CONTACT US »   TERMS OF USE & PRIVACY POLICY »

Can Defense ETFs Survive A Spending Slowdown? | Self Directed Investor | Copyright © 2008 - 2016, All Rights Reserved

Any ideas and opinions presented in Self Directed Investor content are for informational and educational purposes only, and do not reflect the opinions of BNK Invest, Inc. or any of its affiliates, subsidiaries or partners. In no way should any content contained herein be interpreted to represent trading or investment advice. None of the information contained herein constitutes a recommendation that any particular security, portfolio, transaction, or investment strategy is suitable for any specific person. All site visitors agree that under no circumstances will BNK Invest, Inc,. its subsidiaries, partners, officers, employees, affiliates, or agents be held liable for any loss or damage caused by your reliance on information obtained. Read Full Disclaimer.

SDI is associated with: ValueForum.com -- a subscription-based online social networking forum of serious individual investors. | MarketNewsVideo.com -- videos appearing on SDI are produced by Market News Video. | TickerTech.com -- stock quote content appearing on SDI is at least 20 minutes delayed and is powered by Ticker Technologies. | GoldStockStrategist.com -- Edited by Scott V. Nystrom, PhD, Gold Stock Strategist provides analysis on gold mining companies.