Best Defense ETFs: Congress almost always increases the U.S. military budget every year. Even as the U.S. scaled back its presence in Iraq, Congress passed a $768 billion military budget, the largest amount in history. It’s also the federal government’s biggest expense, making up about 54% of discretionary spending.
About a quarter of this money goes to paying military personnel. The country has about 1.4 million active duty members and more than 857,000 reserve and guard members. Additionally, about 40% goes to operations and maintenance. Basically, the government needs to keep its assets in good condition.
That leaves nearly 35% of the budget to research, development, testing, evaluations, and procurement. Very little of this work takes place within the military itself. Instead, the government contracts the work to independent businesses, such as defense contractors Lockheed Martin and Raytheon.
The government rarely shows a desire to scale back military funding. That creates an investment opportunity in companies like Lockheed Martin that can likely count on stable and growing revenues from government budget increases.
Although you could invest directly in publicly traded companies like Lockheed Martin, it’s a bit of a gamble because it assumes that certain companies will always win military contracts. To mitigate risk of any single defense contractor losing out on a government bid, you can choose to diversify your holdings through some of the best defense ETFs.
Although defense ETFs haven’t done as well as expected over the last few years, buying now could be the right time as the drums of war beat louder.
Let’s take a closer look at which three you should consider.
SPDR S&P Aerospace & Defense ETF (XAR)
SPDR S&P Aerospace & Defense ETF (XAR) has more than $1.4 billion in assets under management. It only has 31 holdings, which will likely surprise investors experienced with much larger, more diverse ETFs.
XAR keeps all of its holdings under 6%, which might also surprise some investors accustomed to seeing ETFs that balance risk by investing heavily in a few top-performing companies. The fund’s top holdings by weight are:
- Mercury Systems Inc. (5.67%)
- Lockheed Martin Corporation (5.11%)
- Northrup Grumman Corporation (4.86%)
- L3Harris Technologies Inc. (4.74%)
- General Dynamics Corporation (4.61%)
Most of these names will look very familiar to anyone interested in the defense sector. In fact, most of these names are also in the top five holdings of iShares U.S. Aerospace & Defense ETF and Invesco Aerospace & Defense ETF.
XAR’s top holding, Mercury Systems Inc, isn’t as popular as the others, though. Mercury Systems is a fairly small company with about 2,300 employees working around the world.
Less than 25% of those employees have security clearances from the Department of Defense. Mercury Systems builds excellent products, including radar systems and display systems rugged enough for military use.
Since going public at the end of 1998, the company’s stock price has been erratic. Between 2000 and 2017, it mostly stayed within the $20 to $40 range. Not terrible, but hardly impressive. During the summer of 2019, it broke the $85 mark. It was on its way even higher until the pandemic rocked the stock market.
Its price fell with the rest of the market on March 20, 2020. It quickly regained its value, though, which shows considerable strength. So far, 2022 has been a volatile year, although it has been moving upward since Russia invaded Ukraine.
Not surprisingly, SPDR S&P Aerospace & Defense ETF has also been a little volatile over the past six months. It hit a high point on November 5 at $125.62. It hit a low point on January 27 at $107.27. As you will see with most defense ETFs and individual stocks, SPDR S&P Aerospace & Defense ETF’s value has been growing since the recent invasion.
iShares U.S. Aerospace & Defense (ITA)
iShares U.S. Aerospace & Defense ETF invests heavily in five companies that you would expect to find in a defense ETF. It’s top holdings by weight are:
- Raytheon Technologies Corp (22.70%)
- Boeing (15.21%)
- Lockheed Martin Corp (6.49%)
- Northrup Grumman Corp (5.44%)
- L3Harris Technologies Inc (5.21%)
Over the past six months, the iShares U.S. Aerospace & Defense ETF lowest price was $95.53 on December 1, 2021. The highest price was $111.90 on February 28.
It’s interesting to note that the somewhat low price of ITA means that you can indirectly invest in high-value companies without spending a lot. You can expect one share of Lockheed Martin or Northrup Grumman to cost at least $450.
Even Raytheon, which typically sells for a little under $100, looks like a good deal here.
Boeing is the weak link right now. It has struggled financially since its 737 MAX airplane recalls and canceled orders. Overall, the company lost about $80 billion from the MAX crashes.
Invesco Aerospace & Defense ETF (PPA)
Invesco Aerospace & Defense ETF has divided its investments fairly evenly among five of the most reliable defense companies in the U.S. It’s hard to find a more reliable approach to investing in defense. As long as the sector does well, as it historically has, you should see long-term gains.
Invesco Aerospace & Defense ETF’s holdings by weight include:
- Lockheed Martin Corp (7.74%)
- Northrop Grumman Corp (7.14%)
- Raytheon Technologies Corp (6.86%)
- General Dynamics Corp (5.89%)
- L3Harris Technologies Inc (5.43%)
That’s an all-star lineup of companies that routinely win military contracts.
PPA had a stellar year in 2019. During that year, its stock price went from about $49 to $70. It lost all of that value (and more) in March 2020. Since then, it has regained its value and come close to topping $80.
Should You Invest in Defense ETFs?
The military will always need private contractors to fulfill its orders and develop new technologies. From that perspective, it makes sense to invest in defense ETFs. Recently, the defense sector has struggled to grow in value. That forced many investors to take stock.
It seems likely that these three defense ETFs will make good long-term investments as the war cycle turns up.
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