After A Lull, Will Defense-Related ETFs Surge Ahead?

U.S. defense and aerospace stocks had suffered a lull in the past month (as of Mar 13, 2019) and snapped their longest losing streak in more than a decade on Mar 13, after the release of federal fiscal 2020 budget.

Defense stocks were subdued in the last few months of 2018 amid worries that defense spending has peaked. The stocks suffered in the past month too as Boeing (NYSE:BA) shares fell 13% after Ethiopian Airlines crash. Defense ETF iShares US Aerospace & Defense ETF (HM:ITA) is down 2.1% in the past month (as of Mar 13, 2019). Against this backdrop, a simulative budget plan gave a much-needed boost to the sector.

Inside the Budget Proposal

President Donald Trump unveiled his third budget proposal for fiscal 2020, which begins on Oct 1, 2019. The record $4.75 trillion budget proposal seeks to bolster funding for defense and border walls while cutting down on social and domestic programs like education and environmental protection (read: Trump Proposes 2020 Budget: ETFs to Top & Flop).

Trump has proposed a 5% or $34 million increase in defense spending to a total of $750 billion, beating Pentagon officials’ expectation of a budget of $733 billion, which would mark a 2.4% increase over last year’s. However, Bernstein said the budget levels were in line with expectations while Morgan Stanley (NYSE:MS) called the pitch “lackluster,” and does not expect it to make it through Congress. “The $750 billion headline defense budget was at the upper end of expectations, but light on investment funding,” per Morgan Stanley analyst Rajeev Lalwani.

How Big Is the Proposal?

The proposed budget for 2020 was up from $716 billion in fiscal 2019 and $700 billion in 2018. Notably, the 2018 proposal was itself a 10% jump from former president Barack Obama’s last defense budget in fiscal 2017. However, the latest proposal of President Trump also aims to boost spending in Veterans Affairs and Homeland Security.

Per an article published on asiatimes.com, it is technically illegal for the U.S. military to approved more than $576 billion in fiscal 2020. “That is the cap placed on the Pentagon by the Budget Control Act (BCA) of 2011, which was passed by a Republican Congress to help pay down the US deficit. Congress can override the budget caps — and it has done so in the past — but only by raising spending for both defense and non-defense programs.”

But in the latest budget blueprint, Trump resorted to funding cuts for social and domestic programs like education and environmental protection. The large reduction of $1.1 trillion has been proposed from lower spending on discretionary domestic programs, outside of the military, over the course of a decade.

ETFs in Focus

Whatever the case, a big fat defense budget proposal should boost the related ETFs in the coming days.

SPDR S&P Aerospace & Defense (NYSE:XAR) ETF ( (LON:XAR) )

The underlying S&P Aerospace & Defense Select Industry Index represents the aerospace & defense sub-industry portion of the S&P Total Stock Market Index. It charges 35 bps in fees and added about 0.4% on Mar 13 (read: 4 Sector ETFs to Play Upbeat Earnings Beat Ratio).

iShares U.S. Aerospace & Defense ETF (HM:ITA)

The underlying Dow Jones U.S. Select Aerospace & Defense Index measures the performance of the aerospace and defense sector of the U.S. equity market. It charges 43 bps in fees and gained about 0.7% on Mar 13.

Invesco Aerospace & Defense ETF (PPA)

The underlying SPADE Defense Index comprises approximately 50 U.S. companies whose shares are listed on a U.S. Exchange. These are companies that are principally engaged in the research, development, manufacture, operation and support of defense, military, homeland security and space operations. The fund charges 60 bps in fees and gained about 0.7% on Mar 13.

Pacer Military Times Best Employers ETF (VETS)

The fund tracks the Military Times Best for Vets Index, which includes U.S. listed stocks of companies that have been involved in the Best for Vets List for the last three consecutive years, have a minimum market capitalization of $200 million. The fund was up 0.6% on Mar 13 (read: Salute U.S. Military Veterans With These 2 ETFs).

InsightShares Patriotic Employers ETF (HONR)

The ETF is the product of a collaboration between UBS and VIQTORY. The underlying Military Veterans Index looks to track the price movements of U.S. companies with policies, practices and outcomes that support the employment of U.S. veterans. The fund gained 0.4% on Mar 13 (see all Total Market (U.S.) ETFs here).

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