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

SBM Makes Bullish Cross Above Critical Moving Average
Thu, Jul 2, 4:14 PM ET, by ETF Channel

In trading on Thursday, shares of the ProShares Short Basic Materials ETF (SBM) crossed above ...

RTM Crosses Critical Technical Indicator
Thu, Jul 2, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the Guggenheim S&P 500 Equal Weight Materials ETF (RTM) ...

SPDR S&P Telecom (XTL) Enters Oversold Territory
Thu, Jul 2, 3:54 PM ET, by ETF Channel

In trading on Thursday, shares of the SPDR S&P Telecom ETF (XTL) entered into oversold ...

Akamai Technologies Takes Over #104 Spot From AMETEK
Thu, Jul 2, 11:54 AM ET, by ETF Channel

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

See How Coca-Cola Ranks Among Analysts' Top Dow 30 Picks
Thu, Jul 2, 11:54 AM ET, by ETF Channel

A study of analyst recommendations at the major brokerages shows that Coca-Cola Co (KO) is ...

VCIT: Large Inflows Detected at ETF
Thu, Jul 2, 11:34 AM ET, by ETF Channel

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

IBB, CELG, AMGN, REGN: Large Inflows Detected at ETF
Thu, Jul 2, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: IBB, CELG, AMGN, REGN Exchange traded funds (ETFs) trade just ...

XME, RGLD, STLD, CMP: ETF Outflow Alert
Thu, Jul 2, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: XME, RGLD, STLD, CMP Exchange traded funds (ETFs) trade just ...

DRV Makes Notable Cross Below Critical Moving Average
Thu, Jul 2, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the Daily Real Estate Bear 3x Shares ETF (DRV) ...

AAIT Makes Notable Cross Below Critical Moving Average
Thu, Jul 2, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the iShares MSCI All Country Asia Information Technology ETF ...

FVD, DE, CBRL, CFR: Large Outflows Detected at ETF
Thu, Jul 2, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: FVD, DE, CBRL, CFR Exchange traded funds (ETFs) trade just ...

MDY, AAP, CHD, CNC: ETF Outflow Alert
Thu, Jul 2, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: MDY, AAP, CHD, CNC Exchange traded funds (ETFs) trade just ...

VNM Makes Bullish Cross Above Critical Moving Average
Thu, Jul 2, 11:14 AM ET, by ETF Channel

In trading on Thursday, shares of the Vietnam ETF (VNM) crossed above their 200 day ...

Blackrock a Top Socially Responsible Dividend Stock With 2.5% Yield (BLK)
Thu, Jul 2, 9:24 AM ET, by ETF Channel

Blackrock Incorporated (BLK) has been named a Top Socially Responsible Dividend Stock by Dividend Channel, ...

Vanguard Energy Getting Very Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Vanguard Energy ETF (VDE) entered into oversold territory, ...

Shares of IYE Now Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares U.S. Energy ETF (IYE) entered into oversold ...

IFV Crosses Critical Technical Indicator
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the First Trust Dorsey Wright International Focus 5 ETF ...

XES Crowded With Sellers
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR S&P Oil & Gas Equipment & Services ...

Shares of EPOL Now Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares MSCI Poland Capped ETF (EPOL) entered into ...

Shares of ELD Now Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the WisdomTree Emerging Markets Local Debt Fund ETF (ELD) ...

Oil Services Getting Very Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the Oil Services ETF (OIH) entered into oversold territory, ...

Shares of GDXJ Now Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

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

SPDR S&P Oil & Gas Exploration & Production Getting Very Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the SPDR S&P Oil & Gas Exploration & Production ...

iShares U.S. Oil Equipment & Services Getting Very Oversold
Wed, Jul 1, 4:14 PM ET, by ETF Channel

In trading on Wednesday, shares of the iShares U.S. Oil Equipment & Services ETF (IEZ) ...

HGI Crowded With Sellers
Wed, Jul 1, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the Guggenheim International Multi-Asset Income ETF (HGI) entered into ...

Shares of PSCE Now Oversold
Wed, Jul 1, 3:54 PM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares S&P SmallCap Energy Portfolio ETF (PSCE) entered ...

See How Merck Ranks Among Analysts' Top Dow 30 Picks
Wed, Jul 1, 11:54 AM ET, by ETF Channel

A study of analyst recommendations at the major brokerages shows that Merck & Co., Inc ...

TNA: Large Inflows Detected at ETF
Wed, Jul 1, 11:34 AM ET, by ETF Channel

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

PDP, ORLY, DPZ, DDS: Large Inflows Detected at ETF
Wed, Jul 1, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: PDP, ORLY, DPZ, DDS Exchange traded funds (ETFs) trade just ...

Energy Select Sector SPDR Fund Experiences Big Outflow
Wed, Jul 1, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: XLE, KMI, EOG, WMB Exchange traded funds (ETFs) trade just ...

Guggenheim S&P 500 Equal Weight ETF Experiences Big Outflow
Wed, Jul 1, 11:34 AM ET, by ETF Channel

Symbols mentioned in this story: RSP, CI, CAG, ALXN Exchange traded funds (ETFs) trade just ...

Materials Select Sector SPDR Fund Experiences Big Outflow
Wed, Jul 1, 11:24 AM ET, by ETF Channel

Symbols mentioned in this story: XLB, DOW, MON, LYB Exchange traded funds (ETFs) trade just ...

HYEM Crosses Below Key Moving Average Level
Wed, Jul 1, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the Emerging Markets High Yield Bond ETF (HYEM) crossed ...

Shares of PXJ Now Oversold
Wed, Jul 1, 11:14 AM ET, by ETF Channel

In trading on Wednesday, shares of the PowerShares Dynamic Oil & Gas Services Portfolio ETF ...

14.1% of FNK Holdings Seeing Recent Insider Buys
Wed, Jul 1, 9:44 AM ET, by ETF Channel

A look at the weighted underlying holdings of the First Trust Mid Cap Value AlphaDEX ...

WMT a Top 25 Dividend Giant With $3.67B Held By ETFs
Wed, Jul 1, 8:24 AM ET, by ETF Channel

Wal-Mart Stores, Inc. (WMT) has been named as a Top 25 ''Dividend Giant'' by ETF ...

Why Sysco is a Top 25 SAFE Dividend Stock (SYY)
Wed, Jul 1, 8:24 AM ET, by ETF Channel

Sysco Corp. (SYY) has been named to the Dividend Channel ''S.A.F.E. ...

APD Named A Top Socially Responsible Dividend Stock
Wed, Jul 1, 8:24 AM ET, by ETF Channel

Air Products & Chemicals, Inc. (APD) has been named a Top Socially Responsible Dividend Stock ...

Short High-Yield Municipal Index (SHYD) Enters Oversold Territory
Tue, Jun 30, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Short High-Yield Municipal Index ETF (SHYD) entered into ...

Shares of DOO Now Oversold
Tue, Jun 30, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the WisdomTree International Dividend ex-Financials Fund ETF (DOO) entered ...

Silver Miners Getting Very Oversold
Tue, Jun 30, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Silver Miners ETF (SIL) entered into oversold territory, ...

EMLP Crowded With Sellers
Tue, Jun 30, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the First Trust North American Energy Infrastructure Fund ETF ...

Shares of EEHB Now Oversold
Tue, Jun 30, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares S&P Emerging Markets High Beta Portfolio ETF ...

Copper Miners Getting Very Oversold
Tue, Jun 30, 4:14 PM ET, by ETF Channel

In trading on Tuesday, shares of the Copper Miners ETF (COPX) entered into oversold territory, ...

FEP Makes Notable Cross Below Critical Moving Average
Tue, Jun 30, 3:54 PM ET, by ETF Channel

In trading on Tuesday, shares of the First Trust Europe AlphaDEX Fund ETF (FEP) crossed ...

PBP Makes Notable Cross Below Critical Moving Average
Tue, Jun 30, 3:54 PM ET, by ETF Channel

In trading on Tuesday, shares of the PowerShares S&P 500 BuyWrite Portfolio ETF (PBP) crossed ...

Molson Coors Brewing Moves Up In Analyst Rankings, Passing Reynolds American
Tue, Jun 30, 11:54 AM ET, by ETF Channel

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

IJT, SKX, PRXL, TTC: Large Inflows Detected at ETF
Tue, Jun 30, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: IJT, SKX, PRXL, TTC Exchange traded funds (ETFs) trade just ...

SSO, AES, AET, AMG: Large Outflows Detected at ETF
Tue, Jun 30, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: SSO, AES, AET, AMG Exchange traded funds (ETFs) trade just ...

FXG, PPC, WWAV, WBA: Large Inflows Detected at ETF
Tue, Jun 30, 11:14 AM ET, by ETF Channel

Symbols mentioned in this story: FXG, PPC, WWAV, WBA Exchange traded funds (ETFs) trade just ...

  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 - 2015, 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.