Demand For This $700 Billion Industry Is On The Rise

All after a U.S. Navy destroyer passed through the South China Sea in a show of force, according to Bloomberg. In fact, according to U.S. 7th Fleet Public Affairs…

“These operations demonstrate that the United States will fly, sail, and operate wherever international law allows –regardless of the location of excessive maritime claims and regardless of current events.”

In addition, Republican Mike Gallagher, chairman of the U.S. House Select Committee on China, said the U.S. is also working to shore Taiwan’s defenses, and is encouraging Congress to speed up military aid to the island.

Unfortunately, that’s only stoking China, which said it’s “ready to fight,” as noted by the Associated Press. Even worse, Chinese leader Xi Jinping says he is preparing his country for war. At the annual meeting of China’s parliament, he told his generals to “dare to fight.” He also announced a 7.2% increase in China’s defense budget.

That being said, some of the top ETFs running on fears of global conflict are — yep, you guessed it — defense sector funds.

With the escalation of geopolitical tensions, it might be time to consider adding some exposure to the sector. There are a couple of options for investors to gain such exposure. They are:

Invesco Aerospace & Defense ETF (PPA)

With an expense ratio of 0.58%, the PPA ETF offers exposure to companies involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations. Some of its top holdings, like Lockheed Martin (LMT), Boeing (BA), and Raytheon Technologies (RTX) will be the companies that many countries around the world turn to as they realize the need to up their military budgets.

Certainly these companies supply much of the American military with a wide range of technologies, many of which need updating as technologies have become more advanced. This means, the sales for these businesses could very likely increase both domestically and internationally very soon.

iShares U.S. Aerospace & Defense ETF (ITA)

In much the same way PPA does, ITA provides exposure to companies that manufacture commercial and military aircrafts and other defense equipment, according to BlackRock. Some of its top holdings include Boeing (BA), as well as L3Harris Technologies (LHX) and General Dynamics (GD).

Important to note here, however, the fee for ITA is a considerable amount lower than that of PPA, perhaps making it more enticing to defense-minded investors.

SPDR S&P Aerospace & Defense ETF (XAR)

With an expense ratio of 0.35%, XAR provides investment results that correspond generally to the total return performance of the S&P Aerospace & Defense Select Industry Index. It also provides another option for investors who see this increasing possibility of this sector becoming a more in play theme.

While not hoping for war to break out, the rate at which countries have been increasing their military budgets should act as a precursory to a higher demand for this sector.

Simple laws of supply and demand are at play in a situation like this and we as investors are tasked with finding the trends before they develop and in doing so, these are the signals we, unfortunately in this case, have to pick up on.

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