The government’s budget for its military program is growing year after year, but the Secretary of Defense is set on reducing costs and improving efficiency in its military projects. Aerospace and defense exchange traded funds (ETFs) may be in for some lean times as the government starts to tighten its belt.
Secretary of Defense Robert M. Gates stated that the government will be reducing its massive budget on weapons systems by making military ships and planes more affordable, reports Christopher Drew for The New York Times. The defense department will start implementing a fixed-price contract where the government and the contractor would share the burden of cost overruns. [ETFs for the Need for Defense.]
The new purchasing procedures should create greater financial incentives for military contractors to complete projects on budget, reducing waste and excess costs in projects. Additionally, the military will provide preferential treatment for those that have shown a history of cost-control. [Defense Budget and ETFs: Value?]
Gates is set to save $100 billion over the next several years and utilize the saved money to modernize the Pentagon, which spends around $400 billion of its $700 billion annual budget on equipment and services. [Boeing Could Lift Aerospace ETFs.]
A Senate subcommittee cut the military budget by $8.1 billion, which would reduce funding on F-35 fighter jets, combat ships and missile-defense equipment, writes Christopher Hinton for The Wall Street Journal. Cut projects were mostly those that had constant delays. Political observers believe that a full budget approval won’t happen before the November election.
Gates’ move to reduce military spending will affect major military contractors, including Boeing Co. (NYSE: BA), Northrop Grumman Corp. (NYSE: NOC), Lockheed Martin Corp. (NYSE: LMT), General Dynamics Corp. (NYSE: GD), and Raytheon Co. (NYSE: RTN).
Analysts have noted that the defense sector is being priced as if a sharp decline in the budget will occur. One potential savior of the industry may be that many of these companies aren’t solely reliant on defense spending and have diversified into other areas and industries.
For more information on the defense industry, visit our aerospace & defense category. Currently, both aerospace and defense ETFs are below or just sitting on their long-term trend lines. As this situation plays out, watch the lines and sign up for alerts to be notified of trading opportunities.
- iShares Dow Jones U.S. Aerospace & Defense (NYSEArca: ITA)
- PowerShares Aerospace & Defense (NYSEArca: PPA)
Max Chen contributed to this article.