Market Pulse: Best way to own defense stocks
November 16, 2017
North Korean tensions are increasing. Russia tried to influence our elections and divide our country. There are acts of terrorism both here and overseas.
Unfortunately, these and other geopolitical tensions are on the rise. Keeping our country safe isn't a partisan issue, which is why most everyone expects defense spending to increase. What does that mean for investors?
There are several exchange-traded funds (ETFs) that make it easy to invest in defense stocks. The largest is iShares U.S. Aerospace & Defense (ITA). This ETF has a 0.43 percent annual fee and is capitalization weighted so its five largest holdings (Boeing, United Technologies, Lockheed Martin, General Dynamics, and Northrop Grumman) comprise 40 percent of the portfolio. ITA is up 28 percent this year.
The PowerShares Aerospace & Defense ETF (PPA) is also capitalization weighted, so the above-mentioned stocks comprise a large percentage of this portfolio as well. Its management fee is 0.50 percent. PPA is up 25 percent this year.
The SPDR Aerospace & Defense ETF (XAR) holds an equal-weighted portfolio, so large companies like Boeing and Lockheed have the same weighting as lesser-known companies. XAR's fee is 0.35 percent, and it is up 27 percent this year.
In the cyber security arena, there is the ETFMG Prime Cyber Security ETF (HACK). This ETF holds companies that offer hardware and software that defend against cybercrime. Its largest holdings are Science Applications Int'l, Sophos Group, and Trend Micro. HACK is up 14 percent this year.
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While these ETFs make it easy to own defense companies, I think investors can save money by simply buying the industry's largest holdings. Using a $5 commission rate, it would only cost $25 to buy the five largest aerospace and defense stocks, which cover nearly half of the industry. That way there would be no cost to hold the portfolio.
In September, the Senate passed a $700 billion National Defense Authorization Act. The House already passed its version so we don't know the final total, but there will be a big jump in spending. Plus, it's not just U.S. military spending that will rise. NATO countries are being pressured to ramp up spending as well.
Some might say the defense stocks rose too much and are too pricey. Maybe. But these companies will be around for a long time, so even if your timing is off the next bull market will make it right.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.
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