Billions Are Flowing Into This Industry — 2 ETFs Tracking It
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Namely, the growing concern regarding China’s desire to annex Taiwan, as well as its increased influence in the Asia-Pacific region. Some fear any confrontation will quickly escalate into an all out ‘hot war.’ This is one reason why, even as Congress fights over the debt ceiling, neither side suggests budget cuts will come out of military spending. For fiscal 2023 the Department of Defense’s (DoD) budget was pegged at $1.4 trillion, a 3.5% increase over the 2022. Of that, $800 billion goes directly to military spending with nearly some $320 billion paid to third party contractors who build the planes, missiles, support equipment, and software, as well as associated maintenance costs. Based on President Joe Biden’s current budget proposal there would be increased spending on nuclear research and development, while likely provoking opposition in Congress through proposals like cutting back on Army troops and retiring old Navy ships and Air Force planes. The budget request reflects plans for costly new defense systems — from upgrading the nation’s aging nuclear weapons to developing new hypersonic weapons. There’s a special emphasis on developing new missile warning satellites and protecting those already in orbit. Under Biden, the Pentagon has stressed retiring older “legacy platforms” to steer operations and maintenance savings into programs like space systems that would be more relevant in a conflict with China. As much as it pains me to see graphics like the one below showing how outsized U.S. military spending is compared to the rest of the world, it is the reality, and one that doesn’t appear will change anytime soon.Source: Council on Foreign Relations
According to a statement issued by NATO Secretary General Jens Stoltenberg last December, only 5 of the 30 NATO members met the organization’s target of spending 2% of GDP on defense in 2022. NATO countries will soon discuss their defense spending as some countries propose making the 2% target a minimum. The underspending on defense will likely turn into a tailwind as countries start to ramp up on orders in order to meet the target. It is this type of ‘visibility of demand’, to put in business terms, along with increased geopolitical tensions that makes the defense sector worth a second look. Using Magnifi Personal I found two funds that focus on the defense and military industry. Take a look: iShares Aerospace and Defense ETF (ITA) This fund is among one of the largest with over $5.6 billion under management, diversified across many different areas of this industry.Source: Peter G. Peterson Foundation Website
Another ITA top holding is Raytheon (RTX) best known for its satellite communications and surveillance and missile systems. RTX also does a sizable business with commercial businesses such as airlines and about 18% of its revenue comes from maintenance contracts. Transdigm (TDG), which carries 5.1% weighting in ITA, makes equipment and components, such as winches, sealants and locking latches to cockpit displays and communication devices. S&P Kensho Future Security (FITE) For those looking to be even more aggressive, FITE is a relatively small fund with just $30 million under management, however, it focuses on next generation technology such as drones, wearables, and cybersecurity provides potential for double digit growth in coming years. Also, by owning smaller companies it can benefit from takeovers and mergers among the industry.This image is not a recommendation or individual advice. Please see bottom disclaimer for additional information, including Magnifi Communities’ relationship with Magnifi.
FITE’s second largest holding is Rapid7 (RPD), another little known company with a $2.1 billion market cap, focused on cybersecurity with an emphasis on building IT infrastructure that identifies data vulnerabilities. It gets about 28% of it This is content from Adam Mesh’s All Star Funds service. If you’d like to get more expert insight on the $27-trillion fund marketplace — including a report with Adam’s three favorite funds — you can sign up for All Star Funds by clicking here!This image is not a recommendation or individual advice. Please see bottom disclaimer for additional information, including Magnifi Communities’ relationship with Magnifi.