Wars and global conflicts in the Middle East and Ukraine have increased defense spending and heightened security concerns, which in turn affect the defense industry and can potentially boost the performance of defense ETFs.
Investors need to know, however, that a defense ETF can provide more than just growth potential from increasing defense spending. Learn the benefits and risks of investing in defense and aerospace ETFs and see the top defense sector funds.
What Is a Defense ETF?
A defense ETF is an exchange-traded fund that invests in companies operating within the defense and aerospace sector. These funds typically track a benchmark, such as the Dow Jones U.S. Select Aerospace & Defense Index, which includes stocks of companies involved in the production of military equipment, technology, aerospace and related products and services, such as cybersecurity .
Many of the companies within the defense and aerospace sector have substantial contracts with government entities, particularly the U.S. Department of Defense.
Why Invest in Defense and Aerospace ETFs?
Investing in defense and aerospace ETFs can be a strategic choice for investors who are looking to achieve specific investment objectives, such as portfolio diversification, technological advancements in cybersecurity, growth in government defense contracts and potential for income.
Here are some reasons why investors might consider investing in defense and aerospace ETFs:
How Wars and Global Conflicts Impact Defense Stocks and ETFs
Wars and other global conflicts have a significant impact on defense stocks. Historically, defense stocks tend to rise in response to geopolitical tensions and conflicts. That is because increased tensions and conflicts lead to higher demand for defense products and services.
For example, the stock prices of major defense contractors such as Lockheed Martin (LMT) , Northrop Grumman Corp. (NOC) and RTX Corp. (RTX) , which includes Raytheon Intelligence & Space and Raytheon Missiles & Defense, all rose significantly following the onset of the Israeli-Hama war in 2023 and Russia's invasion of Ukraine in 2022. That was because of the expectation that the conflicts would lead to increased demand for defense products and services.
For reference, the top three largest defense ETFs gained an average of about 3.0% in the month of October 2023, when the Israeli-Hamas war started. The 10-year returns averaged about 11.0%.
However, the impact of global conflicts and wars on defense stocks is not always straightforward. In some cases, conflicts can actually lead to a decline in defense stocks if investors perceive that the conflict is not likely to lead to a significant increase in defense spending.
Overall, the impact of global conflicts and wars on defense stocks is complex and depends on a variety of factors, including the severity of the conflict, the perceived threat to national security and the overall economic outlook.
Top Aerospace and Defense ETFs by AUM
|
Ticker |
Fund |
AUM |
Expense Ratio |
1-Yr Return |
|
ITA |
iShares U.S. Aerospace & Defense ETF |
$6.2B |
0.40% |
44.15% |
|
PPA |
Invesco Aerospace & Defense ETF |
$4.4B |
0.57% |
46.24% |
|
XAR |
SPDR Aerospace & Defense ETF |
$2.4B |
0.35% |
42.64% |
Data as of October 1, 2024. Past performance is no guarantee of future results.
The Risks of Investing in Defense ETFs
Investing in aerospace and defense ETFs can offer diversification and potential benefits, but like with any investment, it carries certain risks and considerations. Here are some of the risks associated with investing in defense ETFs:
Defense and Aerospace ETFs: Bottom Line
It's important to recognize that the performance of defense ETFs can be influenced by government defense spending, international relations and economic conditions. Investors interested in defense ETFs should conduct thorough research, understand the holdings and expenses associated with the ETF and consider how the fund aligns with their investment objectives and risk tolerance.
Additionally, investors should consider the expenses associated with ETFs and carefully research the specific holdings and strategies of the funds they are considering.
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