Defense: A Top ETF in a "Hot Sector"

07/11/2017 2:56 am EST

Focus: INDUSTRIALS

John Persinos

Managing Editor, Personal Finance

The SPDR S&P Aerospace & Defense ETF (XAR) is considered the benchmark for the aerospace & defense industry, which is one of the hottest sectors you can find right now, asserts John Persinos, editor of Investing Daily's Personal Finance.

The exchange-traded fund’s top holdings represent a “who’s who” of major defense contractors, all of which are poised for a multi-year boom as the Trump administration significantly boosts defense spending.

Because Pentagon spending tends to be recession and inflation resistant, XAR is a defensive growth play that also serves double-duty as a hedge. This issue, we’re adding XAR to the Sector sleeve of our Growth Portfolio.

The surest way to make money over the long term is to tap megatrends with momentum, and ever-bigger defense budgets are a fact of existence that will probably never go away.

Military spending also is vital for national economies and job creation, which makes the defense sector an even more attractive investment proposition. XAR’s portfolio boasts defense companies that are perennial recipients of Pentagon largesse.

Triumph Group (TGI) designs, manufactures, repairs and overhauls aerostructures, aircraft components, accessories, subassemblies, and systems worldwide, making it a crucial supplier for major aerospace/defense OEMs.

As such, TGI is a “picks-and-shovels” play that’s indispensable for blue-chip manufacturers. TGI’s modest valuation (market cap: $1.6 billion) gives it room for even greater growth than XAR’s mega-cap holdings.

Lockheed Martin (LMT) is the largest defense contractor in the world. Lockheed manufactures a host of military aerospace products for the Pentagon and international clients.

Lockheed’s cash cow is the advanced F-35 Joint Strike Fighter, the most advanced combat jet fighter ever built. More than 2,443 of the planes are on order and about 65 already have been built, at a cost of $84 billion.

Lockheed also makes the F-16, which is the world’s most sought-after combat jet. Countries currently lining up for more F-16s include Turkey, Taiwan and Indonesia, among others.

Boeing (BA) manufactures the fighter jets and drones that enjoy consistent demand from the Pentagon and foreign nations.

Boeing confers diversification through its commercial division. In addition to stalwarts such as the 737 and 747, Boeing continues to win big orders for its Dreamliner.

Among the other holdings poised for upward trajectory are United Technologies (UTX), Raytheon (RTN), a missile maker and specialist in drone sensors; General Dynamics (GD), which provides combat vehicles, surface ships, and submarines; and Rockwell Collins (COL), a producer of ultra-sophisticated avionics.

XAR should continue its market-beating ways, as ever-greater federal funding gets diverted to its top holdings. In the Pentagon sweepstakes, there will be winners and losers.

SPDR S&P Aerospace & Defense is less concentrated than its peer and takes a targeted approach to sector investing that should pay off in 2017 and beyond.

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