Defense has traditionally been a sector in which Republicans are loath to make cuts. But a prominent GOP member recently said cuts to defense are “on the table,” raising questions about what such cuts would mean for defense exchange traded funds (ETFs).
Concerns that defense spending would be slashed was enough to turn Goldman Sachs bearish on defense stocks and tell its clients that the defense spending outlook is worse than they might think.
The concern is the result of a proposal from the White House Deficit Commission, which suggests $100 billion of the $200 billion in suggested savings through 2015 could come from defense, according to Barron’s. [Defense ETFs: Hit By Budget Reductions?]
Chris Moody for The Daily Caller reports that although the GOP’s “Pledge to America” left cuts for defense untouched, a few members of the Republican party have – believe it or not – said that they would consider cuts. [Can Defense ETFs Dodge the Pain Of Cuts?]
LA Observed reports that two wars and the growing number of terrorist threats have given reason for the large defense budget, however, the deficit is such an issue that Congress has to consider cuts to the defense budget. Aerospace companies have been aware of the shift and are already in cutback mode.
Despite the threats to the budget, PowerShares Aerospace & Defense (NYSEArca: PPA) and iShares Dow Jones U.S. Aerospace & Defense (NYSEArca: ITA) have done fairly well this year; PPA is up 8.8% year-to-date, while ITA has done better, up 15.4%.
There’s no point in sounding the death knell for defense ETFs just yet, since the cuts aren’t actually in place and government spending isn’t the only source of revenue for these companies. Many of these companies are diversified in other areas, such as commercial aircraft, satellites, human space flight and other services.
Both funds are above their long-term trend lines, so there’s a trend there that might be worth exploring if you want to get exposure to this sector.
Tisha Guerrero contributed to this article.