With global security concerns rapidly heating up, it’s no surprise that investors are seeking returns in stocks connected to defense and military operations. While there isn’t an ETF specifically meant for wartime, there are several with exposure to the defense and aerospace industries. Here are five of the top defense ETFs you should consider.
iShares US Aerospace and Defense (ITA)
ITA is a fund that holds shares in 33 companies engaged in the aerospace and defense sector. The fund’s three largest holdings are Raytheon, Boeing and Lockheed Martin. The aforementioned stocks are weighted at 22.70, 15.21 and 6.49 of the fund’s portfolio, respectively.
The ITA fund’s expense ratio currently stands at 0.42 percent, all of which is accounted for by its management fee.
ITA has produced one of the better YTD returns among defense ETFs at 6.32 percent. Over the last 10 years, the fund has returned an average of 14.33 percent. Overall, the fund’s historic returns and focus on large, proven defense contractors stand out as its biggest advantages.
The one major disadvantage of ITA is the concentration of its holdings. With so much of its portfolio tied up in just three companies, ITA may miss out on gains from smaller companies producing higher growth.
With that said, the three major defense contractors are historically very stable and have produced excellent returns for the fund in the past. The expense ratio is also slightly higher than some competitor ETFs, though the difference is quite small.
SPDR S&P Aerospace and Defense (XAR)
The XAR ETF holds 31 defense and aerospace stocks.
The top three holdings in XAR’s portfolio are Mercury Systems, Lockheed Martin and Northrop Grumman. These stocks comprise 5.67, 5.11 and 4.86 percent of the fund’s total holdings, respectively.
The expense ratio for XAR is 0.35 percent.
XAR does offer more balance than ITA by putting less of its holdings in each individual stock. The fund has returned an average of 15.62 percent over the last 10 years, giving it a slightly better historic performance than ITA.
The disadvantage of XAR is that it doesn’t have the same ability to capitalize on Boeing and Raytheon that ITA does. This has likely contributed to lower performance this year, with the fund down 5.41 percent YTD.
Over the long haul, though, XAR’s historic returns show it to be an excellent investment vehicle.
ARK Space Exploration and Innovation (ARKX)
ARKX primarily invests in space exploration companies, though this also gives it natural defense exposure. At any given time, the fund consists of 35-55 stocks operating in this market.
The ARKX portfolio is substantially different from most defense ETFs in terms of its holdings. Kratos, Trimble and L3Harris Technologies are its top three holdings at 9.06, 8.82 and 7.62 percent, respectively.
ARKX has one of the higher expense ratios at 0.75 percent, all of which is charged as a management fee.
The advantage of ARKX is that it offers investors access to a pool of companies that aren’t typically found in defense ETFs. This makes it a decent tool for diversification. The focus on space exploration could also give it strong potential for returns as space flight becomes commercially viable.
On the downside, ARKX has not performed nearly as well as its more traditional competitors. The fund has taken double-digit losses in the first few months of 2022 and is too young to have long-term performance data. It also has a rather high expense ratio that could turn investors away from it in favor of cheaper alternatives.
Direxion Daily Aerospace and Defense Bull 3X (DFEN)
DFEN is a leveraged ETF that provides 3x exposure to defense and aerospace stocks on a market-weighted basis.
The fund’s composition is somewhat similar to that of ITA. Raytheon (RTX), Boeing (BA) and Lockheed Martin (LMT) are its top holdings at 20.83, 17.99 and 5.35 percent, respectively.
The fund’s expense ratio is quite high at 0.96 percent, though it should be noted that this fund magnifies both gains and losses by 300 percent via leverage.
In terms of composition, DFEN’s advantages and disadvantages mirror those of ITA.
The distinguishing feature here is leverage. When defense stocks do well, DFEN produces outsized gains. When these stocks perform poorly, though, the fund will also magnify losses. At 300 percent leverage, the swings can be very substantial in either direction.
Unfortunately, the fund hasn’t performed well since its inception in 2017. Overall, DFEN is down very slightly in terms of all-time return. It should be noted, though, that this includes the magnified losses from the years of the COVID-19 pandemic.
As the economic recovery continues, the fund’s ability to magnify gains could begin to offset these losses and eventually push it into positive territory. This effect is on display so far this year, with DFEN gaining more than 25 percent YTD.
SPDR S&P Kensho Future Security (FITE)
FITE focuses on defense and security stocks, giving it a considerable exposure to companies doing direct business with the military. FITE includes 68 individual stocks.
The top three holdings are Lockheed Martin, Check Point Software and Northrop Grumman at 2.20, 2.16 and 2.11 percent, respectively. The fund’s expense ratio is a reasonable 0.45 percent.
FITE’s portfolio gives investors access to cybersecurity companies and technology stocks that might not otherwise appear in aerospace-focused ETFs. In this sense, FITE is a more comprehensive military ETF. This can be an advantage, especially when defense spending runs high.
On the downside, FITE may underperform aerospace and defense ETFs in some cases. YTD, the fund is down by 8.69 percent. Over time, though, this balances out. The 3-year return for FITE is 14.53 percent. The fund has not been in existence long enough for long-term data.
Is There A War Stocks ETF: Which Is Best?
Overall, ITA seems to be the best long-term bet. Although its holdings are fairly concentrated, ITA offers a reasonable expense ratio, strong long-term returns and exposure to a good mix of aerospace and defense companies.
An argument could also be made for DFEN when these companies do well, though the leveraged nature of the fund makes it far riskier. Overall, ITA is likely the best ETF for war and defense stocks.
Keep in mind that these ETFs can perform very well in times of peace. Aerospace stocks, in particular, are also exposed to civilian markets.
Buying defense ETFs is a solid approach for investing during times of geopolitical upheaval, but it can also be an important part of your broader portfolio under more normal conditions. Defense companies that are buoyed by government contracts can be quite stable, making them good long-term holdings.
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