The heightened level of geopolitical tensions in the wake of the Russian invasion of Ukraine has prompted investors to take greater interest in companies in the defense industry, asserts Gavin Graham, contributing editor to Internet Wealth Builder.
Once companies have been approved as suppliers to the defense department, in whichever country, they tend to remain suppliers for a very long time. Many of the major defense contractors in the US have relationships stretching back to World War II and before.
Overall, defense contractors are exceptionally well positioned for years of sustained growth in revenues and earnings, assuming they can keep costs under control. With many contracts on a cost-plus basis, or with some form of inflation provision, defense companies enjoy sustainable high margins and limited competition.
The simplest way to gain exposure to the sector is to buy an aerospace and defense ETF. This approach offers wide ranging exposure and avoids any issues arising from delays in a particular program.
My choice for a suitable defense fund is the Invesco Aerospace and Defense ETF (PPA). The ETF was launched in October 2005. It has $1.6 billion in assets under management (AUM). The largest five holdings are Lockheed Martin (LMT), Raytheon (RTX), Northrop Grumman (NOC), General Dynamics (GD), and Boeing (BA).
The management fee is 0.5%, which is reasonable for a specialist ETF. The ETF paid $0.66 in dividends in the last twelve months. Payments are quarterly and variable.
The Invesco Aerospace and Defense ETF is suitable for investors comfortable with owning arms manufacturers and willing to accept a relatively low yield.
In return, you’ll have a position in a wide range of major companies with longstanding relationships with the US and other NATO and allied military forces, at a time when governments have committed to raising the percentage of GDP spent on defense in view of the increased levels of geopolitical uncertainty.