Billions Are Flowing Into This Industry — 2 ETFs Tracking It

President Biden made a surprise visit to Ukraine to meet with President Zelensky this weekend. Hopefully, this bodes well for bringing a peaceful resolution to a war that is now going on a year since Russia started it. Whatever the outcome, it seems certain an increasing amount of money and supplies will be funneled spent on defense and provide security to the region. According to the Council on Foreign Relations, the U.S. had spent billions on aid to Ukraine with nearly half going to military assistance.

Source: Council on Foreign Relations

This is causing some leaders, especially in the Pentagon, to be concerned the U.S. is depleting its inventory, leaving it ill prepared to manage what global threats the future could bring.

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: Peter G. Peterson Foundation Website

In fact, rather than the U.S. implement cuts it appears other countries will ramp up their spending.

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.

This image is not a recommendation or individual advice. Please see bottom disclaimer for additional information, including Magnifi Communities’ relationship with Magnifi.

One it’s top holding are NorthropGrumman Cop (NOC), whose shares gained 34% in 2022 but have slid some 14% YTD in 2023. The sell-off comes despite a strong Q4 earnings reported on January 26th. One area of considerable strength was NOC’s Space Systems division which saw 27% YoY revenue growth as it increasingly applies its military satellites to commercial uses.

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.

For example, one its top holding was Maxar Technologies (MAXR), which has a 5.7% weighting and offers geospatial data sourced from its advanced satellite constellation services for national security, was recently acquired by Advent International at $53 a share, a 90% premium to the 20 day average closing price prior to the bid.

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!