This article was originally published on ETF Trends.com.
Aerospace and defense ETF investors will be closely watching President Donald Trump's proposed $4.4 trillion federal budget as it includes a sizable increase in Pentagon's budget.
Trump's new spending plan could allocate an additional $74 billion to the Pentagon's budget, a 14% increase, Bloomberg reports.
The $686 billion defense request for the fiscal year ahead would help the Navy hit a new goal of 355 ships, restore major funding for a Boeing Co. fighter jet favored by the Oval Office and increase missile defense spending to counter threats, according to a Bloomberg report.
The defense spending would help replace old Navy ships nearing the end of their useful life and expand the fleet to 299 vessels by the end of fiscal 2019. Missile defense has also seen greater urgency in face of rising threats of North Korea's accelerated missile and nuclear programs. Lastly, Trump has praised Boeing's Super Hornet, which President Barack Obama's administration sought to phase out.
However, the exorbitant defense package could come across many hurdles in Congress as officials debate the finer details of the proposed spending plan.
“The risk with such a large increase in the defense budget is that policy makers will be reluctant to make hard choices,” Todd Harrison, a defense analyst with the Center for Strategic and International Studies, told Bloomberg. “DoD is still in desperate need of reform in many areas. It has 19 percent excess capacity in U.S. bases, a personnel system stuck in the 1950s, and scores of legacy weapons that need to be retired. If reforms aren’t made in these areas, the military will just get fatter, not stronger.”
“The real story of the fiscal 2019 defense request is “the growth trajectory from” the 2017 defense bill that was enacted “as opposed to 2019 in isolation,” Mackenzie Eaglen, a budget analyst for the conservative American Enterprise Institute, told Bloomberg, pointing to a 17.4% increase in base defense budget from 2017 to 2019, which includes the budget plan approved by Congress that provides for an increase of 2.9% from fiscal 2018 to 2019.
ETF investors can also keep tabs on a potential favorable spending outlook for the defense sector through related ETFs, such as the iShares U.S. Aerospace & Defense ETF (ITA), PowerShares Aerospace & Defense Portfolio (PPA) and the SPDR S&P Aerospace & Defense ETF (XAR) . Additionally, more aggressive traders have also looked to the Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN), which takes the 3x or 300% daily performance of the same underlying index, as a quick way to capitalize on any new developments.
For more information on the aerospace industry, visit our aerospace & defense category.
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