Investors: How to Play Defense With Defense ETFs

Home to a group of cyclical stocks, plenty of which have export exposure, the iShares U.S. Aerospace & Defense ETF (Cboe: ITA) is, perhaps not surprisingly, lower by 4.54% over the past week as markets have been drubbed on escalating trade fears.

However, some market observers believe investors can play some defense with aerospace and defense stocks and ETFs like ITA.

“If you want to be defensive, maybe it’s just as simple as owning a couple of defense names,” said Gradient Investments President Michael Binger on CNBC’s “Trading Nation.” “We currently own Raytheon and Lockheed Martin — they’ve both just had good quarters, they tend to hold up very well in market corrections or downturns, they’re high-quality companies, and they’re reasonably valued.”

The Benefits of Defense ETFs

U.S. markets received a boost after Chairman Powell’s intimation of a rate cut last month. This comes, once again, after New York Fed President John Williams said central banks must take action when faced with adverse economic conditions, fueling bets the Fed could take on a more aggressive 0.5% rate cut in July. However, the bank later clarified that Williams did not intend to signal any specific policy changes. Industrials, the sector in which ITA components reside, are usually solid performers in lower interest rate environments.

Related: Industrial Sector Could Benefit From a Rate Cut or Two 

Up 20% year-to-date, ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index and holds 33 stocks. The ETF has a three-year standard deviation of just over 17%.

ITA is a cap-weighted ETF, meaning it has larger weights to big-name defense stocks, including Dow components Boeing (NYSE: BA) and United Technologies (NYSE: UTX). Aerospace and defense stocks are part of the broader industrial sector and have been essential drivers of the sector’s performance over the past year. In fact, aerospace and defense names have been industrial leaders.

For savvy traders, the Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN) seeks daily investment results, before fees and expenses, of 300% of the performance of the Dow Jones U.S. Select Aerospace & Defense Index.

For more information on the aerospace industry, visit our aerospace & defense category.