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2 Mutual Funds to Benefit From Trump's Defense Budget

Nitish Marwah

President Trump’s efforts to boost U.S. military strength have paved the way for the sector’s gains in the recent past. Defense stocks have had a great run since Donald Trump became President, courtesy of his humongous defense spending plan. Rising geopolitical conflicts on a global scale and the magnitude of existing issues are expected to bolster growth of U.S. defense companies in 2020 as well.

Meanwhile, per the latest reports, global military spending saw the biggest increase in 2019. The latest annual assessment of the International Institute for Strategic Studies (IISS) titled, The Military Balance 2020 shed light on the fact that global defense spending rose 4% in 2019 from 2018 amid "an unstable international security environment."

The Unites States was the highest spender on defense in 2019 with $638 billion, followed by China, which spent $185 billion. The increase in U.S. defense budget of $53.4 billion from 2018 was almost equal to Britain's entire defense budget.

Under such circumstances, investing in mutual funds having significant exposure to defense companies seems prudent.

Defense Spending to Boost Gains for the Space

Per the U.S. Department of Defense’s (DoD) fiscal 2021 budget proposal sent to Congress on Feb 10, the Trump administration’s fiscal 2021 defense budget request stands at $740.5 billion. This comes after three straight years of increases and is also in line with the two-year budget deal between the Congress and the White House last year. The Pentagon would be allotted $705.4 billion of the total budget.

The 2020 defense budget stands at $738.0 billion. This marks an increase of around $20 billion from the last year. The money is expected to be used for the establishment of the U.S. Space Force as well as for military hardware such as 98 F-35 and eight F-15EX aircraft.

Furthermore, the Pentagon wants to retire warplanes, drones and ships, some of which are less than two decades old. The idea is to free up billions of dollars, which could be used to develop as well as buy new weapons that defense officials believe are necessary to win a war against rivals like China and Russia.

Also, in September 2018, the Pentagon had announced that it would approximately spend $2 billion over the next five years on development of artificial intelligence.

2 Best Funds to Buy Now

Given such positives, we have highlighted two mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from these developments. Moreover, these funds have encouraging three and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Select Industrials Portfolio FCYIX fund seeks capital appreciation. It normally invests a large portion of its assets in the common stock of companies principally engaged in the research, development, manufacture, distribution, supply, or sale of materials, equipment, products, or services related to cyclical industries. United Technologies and Ingersoll-Rand are among the fund’s top defense holdings.

This Sector - Other product has a history of positive total returns for over 10 years. Specifically, the fund has returned 8.7% over the three-year and 8.8% over the five-year benchmarks. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FCYIX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.76%, which is below the category average of 1.10%.

Fidelity Select Defense & Aerospace Portfolio FSDAX fund invests a huge portion of its assets in securities of companies involved primarily in the research, manufacture and sale of products and services related to defense or aerospace industries. It seeks capital growth by investing in both U.S. and non-U.S. companies. Boeing and Northrop Grumman are among the fund’s top defense holdings.

This Sector - Other product has a history of positive total returns for over 10 years. Specifically, the fund has returned 19.8% over the three-year and 15.7% over the five-year benchmarks. To see how this fund performed compared to its category, and other #1 and 2 Ranked Mutual Funds, please click here.

FSDAX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.75%, which is below the category average of 1.10%.

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