On Tuesday, the Senate approved a wide-ranging, $854 billion bill that includes a $675 billion allocation towards the Defense Department, accounting for almost 80% of the total bill. In short, the United States doesn’t skimp on defense spending and this is good news for exchange-traded funds (ETFs) like Direxion Daily Aerospace & Defense Bull 3X Shares (NYSEARCA: DFEN), which has been producing rapid-fire returns.
Such a large allocation towards defense didn’t receive much contention as Senators approved the bill 93-7. The measure now rests in the hands of the House, where lawmakers are expected to approve it next week–just days before a Sept. 30 deadline in order to avert a government shutdown.
“Critically, after subjecting America’s all-volunteer armed forces to years of belt-tightening, this legislation will build on our recent progress in rebuilding the readiness of our military and investing more in the men and women who wear the uniform,” said Senate Majority Leader Mitch McConnell, R-Ky.
McConnell’s comments buttress the willingness of the U.S. government to open their wallets for defense spending–an estimated $610 billion goes towards defense, besting the money spent by the next seven countries combined.
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As far as U.S. equities go, defense stocks have been reaching all-time highs with names like Boeing, Raytheon, Lockheed Martin and L3 Technologies leading the way–a case for profit-hungry traders looking to get on the offensive with defense stocks.
“As a trader, you never ignore all-time highs. That’s usually a very, very strong bullish signal that suggests the market is feeling very positive about long-term trends,” said Boris Schlossberg, managing director of foreign exchange strategy at BK Asset Management.
As such, the gains in equities have been spilling over into ETFs as the iShares U.S. Aerospace & Defense ETF (Cboe: ITA), the largest aerospace and defense ETF, is up nearly 16% year-to-date. ITA’s peers have also experienced similar gains–PowerShares Aerospace & Defense Portfolio (NYSEArca: PPA) is up 10.14% YTD and the SPDR S&P Aerospace & Defense ETF (NYSEArca: XAR) is up 15.255 YTD.
DFEN seeks daily investment results equal to 300% of the daily performance of the Dow Jones U.S. Select Aerospace & Defense Index, which attempts to measure the performance of the aerospace and defense industry of the U.S. equity market. With its triple leverage, DFEN has produced astounding results–23.31% YTD and almost 65% within the last 12 months.
A number of market analysts feel that this run in the aerospace and defense sector could continue even after the extended bull market loses its current momentum. According to MarketWatch investing columnist Philip Van Doorn, “stock prices tend to be driven by increases in earnings. The federal income tax cuts that went into effect this year will no doubt boost profits and potentially share prices. But that party will surely end, after which it is reasonable to expect the aerospace and defense subsector to continue to outperform the broader market.”
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