SPDR S&P Aerospace & Defense (XAR) is considered a benchmark for the aerospace/defense industry; the ETF seeks the total return performance of the S&P Aerospace & Defense Select Industry Index, notes John Persinos, contributing editor to Investing Daily's Personal Finance.
The Russia-Ukraine war and rising inflation make aerospace/defense stocks particularly appealing now. During periods of geopolitical uncertainty, defense spending increases. But defense stocks also make a great hedge against inflation. One reason is the prevalence of cost-plus contracts, which allow military contractors to include higher input costs into what they eventually charge the Pentagon.
If you’re looking for a source of profits that enjoys multi-year momentum, the aerospace/defense sector fits the bill. Pentagon suppliers get a steady stream of contracts, courtesy of taxpayers, regardless of economic cycles, the movement of inflation and interest rates, the political party in power, or monetary policy. Federal Reserve tapering? Defense contractors shrug indifferently.
XAR’s holdings include mega-cap defense majors, such as Textron (TXT) and General Dynamics (GD), ranked at #6 and #9, respectively, as a percentage of the fund’s assets.
Textron is a global conglomerate of aircraft, defense, industrial and finance businesses. General Dynamics provides combat vehicles; information technology solutions for the military; maintenance overhaul and repair for military aircraft; submarines; and surface ships.
But as you can see from the table on this page that lists XAR’s top five holdings, the fund also attempts to diversify toward smaller companies with technology specialties and faster growth prospects.
Another holding Virgin Galactic (SPCE), with a market cap of $2.1 billion, services the booming spaceflight and satellite sectors. Kratos Defense & Security Solutions (KTOS) is another small-cap stock, with a valuation of $2 billion, that’s enjoying tailwinds because it’s in the burgeoning field of drones.
Russia’s military machine is bogged down by Ukraine’s flexible tactics. Central to Ukraine’s fighting approach is precision warfare supported by unmanned aerial vehicles (UAVs), known as drones.
Pilot-less drones are revolutionizing the projection of power around the world. Republican and Democratic presidents alike have widely deployed “hunter-killer” drones in combat theaters overseas. Countries around the world are devoting big sums to producing drones. The U.S. and its allies have been providing substantial numbers of drones to Ukraine.
As the Russia-Ukraine quagmire drags on, the world is in greater danger of nuclear war than at any time since the 1962 Cuban Missile Crisis.
Many of XAR’s holdings enjoy entrenched ties to Pentagon brass. We face several years of booming military expenditures in the U.S. and around the world. These vast sums will end up in the coffers of XAR’s portfolio holdings, in turn enriching shareholders.
The U.S. defense budget represents about 40% of the total global defense budget. Since the terrorist attacks of 9/11, over $9.35 trillion has been allocated to the U.S. defense budget. President Biden has consistently hiked the Pentagon’s budget so far during his tenure. Rising threats posed by peer adversaries such as Russia and China are major reasons.
Biden this year proposed a fiscal year 2023 budget that includes $813 billion in spending for national defense, a 4% increase from the previous spending package. The defense budget boosts we’re seeing at home and overseas enjoy unstoppable momentum.
Providing a countermeasure to superpower rivals isn’t the only motivation behind U.S. defense spending increases. America’s democratic allies are major customers for the firms held by XAR. These affluent nations in Europe are worried about the expansionism of autocratic Russia.
Western Europe has responded to Russia’s invasion of Ukraine with major planned increases in military spending. Since the end of the Cold War, Europe has neglected its defense spending, but that’s about to change.
Germany’s recent departure from its pacifist post-Nazi stance is sending reverberations throughout the Continent. Germany is the biggest economy in Europe and its policies exert outsized influence. Germany is on the cusp of a military shopping spree. XAR provides recession-resistant growth, an inflation hedge, and a way to actually benefit from geopolitical danger.
