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Defense ETFs Take Flight on Bets of Heightened Military Action

This article was originally published on ETFTrends.com.

The aerospace and defense sector, along with related exchange traded funds, were among the few pockets of strengthen on Friday after the U.S. airstrike that killed an Iranian general fueled bets of increased military actions to counter retaliatory responses from Tehran.

On Friday, the SPDR S&P Aerospace & Defense ETF (XAR) advanced 1.7% and the iShares U.S. Aerospace & Defense ETF (ITA) increased 1.1%.

Northrop Grumman Corp. (NOC) led the defense rally, notching in one of their biggest single day gain since late July, the Wall Street Journal reports.

The defense rally stood out in a down stock market Friday that was fueled by risk-off selling. Investors mostly exited out of stocks following the overnight airstrike while shifting over to gold and U.S. Treasury bonds for the safe-haven hedge and oil in light of increased geopolitical risks in the Middle East.

However, some warned that this short-term risk should not detract from the long-term picture.

“Geopolitical events by their nature are unpredictable, but previous periods of increased tensions suggest that the impact on wider markets tends to be short-lived, with more lasting effects confined to local markets and assets that are directly impacted by the tensions,” Mark Haefele, global chief investment officer at UBS’s wealth-management arm, told the WSJ.

XAR seeks to provide investment results that correspond generally to the total return performance of the S&P Aerospace & Defense Select Industry Index, which represents the aerospace and defense segment of the S&P Total Market Index.

ITA seeks to track the investment results of the Dow Jones U.S. Select Aerospace & Defense Index composed of U.S. equities in the aerospace and defense sector. Aerospace companies in the index include manufacturers, assemblers and distributors of aircraft and aircraft parts.

XAR follows a more equal-weight indexing methodology, so mid-sized companies represent a greater portion of the ETF's portfolio. On the other hand, ITA incorporates a traditional market capitalization-weighted indexing methodology, which has resulted in a more top heavy portfolio.

For more aggressive traders, the  Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN) closed 3.31% higher Friday. DFEN seeks daily investment results, before fees and expenses, of 300% of the performance of the Dow Jones U.S. Select Aerospace & Defense Index.  

For more information on the defense industry, visit our aerospace & defense category.

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