A Closer Look at Why Defense ETFs are Worth Every Penny
One of the best ways to diversify at less cost is with an ETF.
In late September 2017, most defense names became very expensive.
- Raytheon (RTN) was up to $185
- Boeing (BA) traded at $256
- General Dynamics (GD) was at $205
- Northrop Grumman (NOC) was at $282
- United Technologies (UTX) was at $114
If I wanted to own just 10 shares of each, it’d cost me $10,420.
If I wanted to own 100 shares of each, now we’re up to $104,200.
At the same time, though, I can gain the same exposure to those by picking up defense ETFs, such as the SPDR S&P Aerospace & Defense ETF (XAR), which traded at $79 a share. The iShares U.S. Aerospace & Defense ETF (ITA) traded at $177 at the time.
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What’s nice is that the ITA doesn’t just provide me exposure to the names listed above. In fact, as of late Sepember2017, it offered exposure to 41 related stocks, including those above plus L3 Technologies (LLL) and Lockheed Martin (LMT).
Meanwhile, the XAR also provided good value with a 40-40-20 weighting with large, mid-cap and small-cap defense and aerospace names as well.
The question becomes – why not pay less for more?
Plus, at the time, defense stocks were some of the safest to own, given tensions with North Korea and a potential $700 billion defense budget proposed by the U.S. Senate.
You may remember President Trump threatening to “totally destroy” North Korea.
"No nation on Earth has an interest in seeing this band of criminals arm itself with nuclear weapons and missiles. The United States has great strength and patience, but if it is forced to defend itself or its allies, we will have no choice but to totally destroy North Korea. Rocket man is on a suicide mission for himself and for his regime. The United States is ready, willing, and able, but hopefully this will not be necessary. That's what the United Nations is all about. That's what the United Nations is for. Let's see how they do."
As a result, Kim Jong-un called President Trump a “mentally deranged U.S. dotard,” and hinted at new weapons test, including an H-bomb test over the Pacific Ocean.
And two, the U.S. Senate had just approved a $700 billion defense budget.
That’s far larger that the $668 billion proposal from Trump, and the $658 billion spending plan from the House in June 2017. The House bill included a $584 billion for the base budget and $74 billion in war funding with much of that money increasing end strength, improving military readiness, modernizing equipment, and investing in future technology, subject to appropriate congressional oversight,” as noted by The Hill.
The Senate didn’t think that was nearly enough, though.
Instead, the announced a $700 billion version of the bill, passing with a vote of 89-8. This one would increase spending on F-35 fighter jets, ships and M1 Abrams tanks, and increase military pay by as much as 2.1%. Plus, it’ll authorize $5 billion for Afghanistan security forces, as well as $8.5 billion to boost U.S. missile defense systems.
News such as this is always likely to boost defense stocks, and add good value to related ETFs at a far less cost of ownership.
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