As bellicose rhetoric grow more vociferous for greater action in the Middle East, investors may turn to the aerospace and defense industry and sector-related exchange traded funds to capitalize on the increased government spending.
Over the past three months, the iShares U.S. Aerospace & Defense ETF (NYSEArca: ITA) rose 9.5%, PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) increased 10.3% and SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) gained 6.3%.
Aerospace and defense stocks have been gaining momentum as the public and western governments step up the fight against the Islamic State, especially after the Paris attacks, reports Gemma Acton for CNBC.
French President François Hollande and Belgian Prime Minister Charles Michel have pledged to put more into fighting the terrorist group while U.K. Prime Minister David Cameron vowed to “build the case” for military intervention in Syria.
Consequently, analysts believe the heightened state of alert will help companies in the security industry, such as gunship manufacturer Northrop Grumman (NYSE: NOC) and fighter jet builder Lockheed Martin (NYSE: LMT).
For instance, Prime Minister Cameron has already added $12. billion to the budget for the purchase of military equipment, which includes allocations to acquire Lockheed Martin “F-35” jets, according to Profit Confidential. The Italian government has also confirmed it will take 90 F-35s for a total value of about $14 billion.
Northrop Grumman makes up 5.6% of ITA, 4.6% of PPA and 3.8% of XAR. Lockheed Martin accounts for 7.1% of ITA, 6.3% of PPA, 3.7% of XAR.
Looking ahead, the U.S. Department of Defense is under pressure to reduce costs, potentially slashing spending by up to $1 trillion by 2021. However, Ronald Epstein, sector analyst at Bank of America Merrill Lynch, argues that other western countries could pick up the slack.
“In our view, if the U.S. pulls back its involvement in the Middle East even though the battlefront continues to move to the West, Western Europe will likely have to spend more on defense spending in order to secure its borders and be able to help prevent future attacks,” Epstein told CNBC.
iShares U.S. Aerospace & Defense ETF
For more information on the defense sector, visit our aerospace & defense category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.