Russia’s military assault on Ukraine has put the focus on Aerospace & Defense stocks and related exchange-traded funds (ETFs).
The Dow Jones U.S. Aerospace & Defense Index is up close to 10% year-to-date (YTD). Over half of those gains came in the past month.
Defense spending worldwide remained strong even during the pandemic. Currently, the US holds the top spot with $770 billion in annual defense budgets. Next comes China, Russia, the UK, Germany, India, Japan, South Korea, Saudi Arabia, and Australia.
Expectations are that the current war will likely lead to a global increase in military budgets. Germany has already pledged to boost defense spending.
Recent research by Deloitte highlights that:
“[A&D] companies are expected to focus on innovation to develop new technologies and solutions, create new markets, and expand growth opportunities.”
Against this backdrop, this article introduces two A&D funds that could appeal to some readers looking to diversify their portfolios.
1. iShares U.S. Aerospace & Defense ETF
- Current Price: $105.05
- 52-week range: $94.13 - $113.13
- Dividend yield: 0.81%
- Expense ratio: 0.42% per year
The iShares U.S. Aerospace & Defense ETF (NYSE:ITA) invests in shares of US-based A&D companies. These names typically manufacture commercial and military aircraft and other defense equipment. The fund was first listed in May 2006.
ITA, which tracks the Dow Jones U.S. Select Aerospace & Defense Index, has 33 holdings. The top 10 stocks in the portfolio account for close to three-quarters of roughly $3 billion net assets.
Raytheon (NYSE:RTN) Technologies (NYSE:RTX), Boeing (NYSE:BA), Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC), L3Harris Technologies (NYSE:LHX), General Dynamics (NYSE:GD), and Howmet Aerospace (NYSE:HWM) lead the names on the roster.
The ETF gained over 7.1% in the last 12 months and 2.2% in 2022. ITA also saw a multi-year high in June 2021.
Trailing P/E and P/B ratios are 26.52x and 3.08x. Given the recent rapid run-up in price, there could soon be profit-taking in ITA. A potential decline toward the $103 level or below would improve the margin of safety for investors looking for a pure-play A&D fund.
2. SPDR S&P Kensho Future Security ETF
- Current Price: $49.29
- 52-week range: $44.74 - $56.18
- Dividend yield: 0.97%
- Expense ratio: 0.45% per year
Our second fund, the SPDR S&P Kensho Future Security (NYSE:FITE), provides access to businesses driving technological innovation in the security sector. Such companies include names in cybersecurity, national border security, robotics, drones, space technology, virtual reality (VR), and wearable technologies. The fund started trading in December 2017.
FITE, which has 68 holdings, tracks the returns of the S&P Kensho Future Security Index. The leading 10 stock comprises close to a fifth of net assets of $27 million. Therefore, it is a small fund.
With regard to sub-sectors, we see aerospace & defense (33.58%), systems software (24.70%), communication equipment (10.85%), and research & consulting services (8.18%).
Leading holdings in the portfolio include Lockheed Martin; cybersecurity names Check Point Software (NASDAQ:CHKP) and Mandiant (NASDAQ:MNDT); Northrop Grumman; defense contractor ManTech International (NASDAQ:MANT), AeroVironment (NASDAQ:AVAV), known for Unmanned Aircraft Systems (UAS); Leidos (NYSE:LDOS) which focuses on defense and intelligence markets.
On Tuesday, internet behemoth Alphabet (NASDAQ:GOOGL) announced it had reached an agreement to acquire Mandiant for $23 a share, in a deal worth $5.4 billion.
FITE returned over 5.2% over the past year but is down nearly 6% YTD. Weakness in cybersecurity and other software stocks have put pressure on the fund.
For instance, the Kensho Cyber Security Index PR has declined about 6.5% since the start of the year. Meanwhile, the Dow Jones Software Index is down 20.8% YTD.
The fund’s trailing P/E and P/B ratios stand at 25.27x and 3.31x. Investors who believe technology will continue to gain traction in defense systems could consider buying the dip in FITE.