28 Feb

Why the Defense Sector Continues to Dazzle

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Defense is the new offense

Aerospace and defense stocks may have benefitted the most from the President Trump administration. The aerospace and defense(A&D) GICS Level 4 sector is up 49% since the inauguration. In addition to the tweet-induced saber-rattling with North Korea, the defense budget is up massively for 2018, and it’s expected to be up again in 2019, as the Republicans have decided that defense for the commonwealth is a top priority now. 

Plus, most A&D companies are squarely located in the United States, so they proportionally benefit from the tax bill again. On the negative side, the sector is a bit pricey here, coming in at almost 22x the forward PE. Take a look at the incredible performance, and be sure to look out for the DFEN (3x Bull) Aerospace and Defense ETF from Direxion. Note that DFEN started on May 3, 2017.

Why the Defense Sector Continues to Dazzle

Market Realist

Most profitable sector since the elections

The aerospace and defense sector has been one of the most profitable sectors since President Donald Trump took office. President Trump has always been highly supportive of expanding the budget for the US military. During his campaign, he promised to boost the military budget by $500 billion–$1 trillion. His victory proved to be a boon for the sector.

Budgetary measures

In 2017, there were some encouraging budgetary allocations. Congress approved a $700 billion defense bill, and the Pentagon’s fiscal 2018 budget proposal of $639 billion took the sector to new highs. Geopolitical tensions, escalating tensions between the United States and North Korea, and an emphasis on missile defense and market competition led to a record year for the aerospace and defense industry.

Other events that drove the sector were mergers and acquisitions, including United Technologies’ acquisition of Rockwell Collins for $30 billion. This year, Northrop Grumman is set to buy Orbital ATK for $9.2 billion. Synergies from these deals are expected to boost the sector further in 2018. Global demand for weapons from nations that want to expand their defense could also add to the sector’s performance this year. The SPDR S&P Aerospace & Defense ETF (XAR), which tracks the performance of the S&P Aerospace & Defense Select Industry Index, rose 32% in 2017.

Investors looking for options in the defense sector can take a look at the Direxion Daily Aerospace & Defense 3X Bull ETF (DFEN), which seeks to magnify the performance of the Dow Jones U.S. Select Aerospace & Defense Index. Since its inception on May 3, 2017, DFEN rose 81% in 2017. As of February 15, 2018, it has returned 21% year-to-date.

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