Looking At Defense Plays? This ETF Is In Prime Position

plane under white clouds

Photo by Daniel Eledut on Unsplash

For the first time in decades, many North Atlantic Treaty Organization (NATO) allies are set to increase military spending.

The security of Europe and the west in general is at stake - and those stakes are rising.

Now, there's no doubt the United States' spending will continue to constitute the lion's share of the roughly $1 trillion in combined annual spending by NATO allies.

But this time, of course, war is raging in Ukraine, on several of NATO's borders. Little wonder several NATO members and other regional militaries are stepping up spending on weapons procurement - I'll have more about that in a moment. But suffice it to say militaries both in NATO and without are urgently modernizing and rearming.

Several U.S. and global companies are uniquely positioned to benefit from this spending, and I've found a direct way to play all of them. These shares are trouncing the S&P 500 right now, too, up nearly 9% year to date against an 7% loss on the big index.

Here's the ticker - and why there's much more upside ahead...

Air Dominance Doesn't Come Cheap

In any modern war, an air force needs to be able to "own" the skies over the battlefield. The airspace over Ukraine, for instance, is still hotly contested nearly two months into the war.

NATO and European countries watching the war unfold in their own backyard are taking no chances, so aerospace constitutes a huge chunk of this increased spending.

Canada, for instance, is looking to replace its Boeing CF-18 "Hornet" fighters. The Royal Canadian Air Force is close to inking a deal for around $15 billion worth of Lockheed Martin Corp. (LMT) F-35 "Lightning" planes.

The German air force is buying 35 Lighting aircraft, and the United Kingdom's Royal Air Force is on track to purchase 47 of them.

And here in the United States, the White House is asking Congress to approve $813 billion for military spending in fiscal year 2023, which begins Oct. 1. That amounts to a roughly 4% increase from the $782 billion enacted for this fiscal year. The Department of the Air Force has requested some $194 billion of that, 11.7% more than fiscal 2022.

Beyond NATO, European countries are beefing up their air fighter capabilities with the F-35, as well. Finland, which borders Russia and is now actively debating signing onto the NATO treaty, is spending $9.5 billion on 64 units of the Lightning.

Even historically neutral Switzerland is shelling out $5.5 billion for the Lockheed jets.

Aerospace spending is only part of the picture, of course. Countries are looking to boost their capabilities in other ways, too. Switzerland is set to spend another $2.1 billion for Patriot surface-to-air (SAM) missile batteries, and many other countries are looking to stock up on Raytheon Technologies Corp. (RTX) formidable Javelin antitank missile system.

There are other upgrades planned, too numerous to mention, but as I said earlier, there's one stock to leverage them all.

Here's the Best Way to Play This Trend

Investors would do well to take a good look at the PowerShares Aerospace & Defense Invesco ETF (PPA). This is a cost-effective exchange-traded fund made up of proven defense and aerospace leaders.

The real power in this ETF is that it positions you to profit from just about every corner of the industry. With nearly 50 stocks in its portfolio, PPA includes aircraft makers, component suppliers, electronics and materials firms, and much, much more.

While defense giants are a big part of the portfolio, we get exposure to smaller firms as well. Large caps make up roughly 45% of the holdings, with small and mid caps accounting for the rest of the portfolio.

Thus, PPA puts you into position to profit on defense plans from D.C. to Brussels and far beyond. I'm talking about such firms as:

  • Mercury Systems Inc. (MRCY): The firm specializes in making plug-and-play subsystems for large defense contractors like Boeing. It has deep expertise in making advanced air-defense gear and supplies products on more than 300 defense programs. For instance, it supplies sensors for the F35 fighter and signal processing systems for the Aegis class aircraft carrier. Mercury's sensor systems also play a critical role in the armed surveillance Predator and Reaper drones.
  • Hexcel Corp. (HXL): Founded in 1946 in the basement of a Bay Area home, this is a global leader in carbon fiber and other advanced composites. This is a company with multiple defense programs that go well beyond the F35 fighter that Finland and other nations are buying. The firm also serves the civilian aviation market with supplies for both Boeing Co. (BA) and archival Airbus Group SE (EADSY) and has a backlog worth about $9 billion for those two firms alone.
  • Honeywell International (HON): has broad exposure to defense and aerospace as well as the civilian aircraft industry. It provides auto and aircraft components along with security systems. That aerospace division is a sort of crown jewel, growing faster than overall defense and airline budgets and with rock-solid profit margins. One area of focus is the firm's approach to market for "connected aircraft," which includes hardware, software, apps, data services, and airtime services that include links to next-gen satellites.
  • RADA Electronic Industries Ltd. (RADA): This is a small-cap maker of defense electronics that includes avionics, radar, and navigation systems. Based in Israel, it counts nearly every member of the Pentagon as a client along with several large defense makers. It ranks as a global pioneer of mini-tactical radar for active military protection, counter-drone operations and border surveillance. As such, the firm says it faces an addressable market worth more than $6 billion. About 72% of sales go to the United States.
  • Axon Enterprise Inc. (AAXN): This stock shows the broad range that PPA offers. The firm makes the non-lethal TASER stun guns used by dozens of law enforcement agencies here in the United States and a growing number of foreign ones. It also makes police body and dash cams and supplies cloud computing services for evidence files. Militaries across the globe are also stepping up their purchases of TASERs and related devices. That leads to more apprehensions and fewer casualties in direct combat situations.

As you can see, with this one investment, we benefit from the entire sector's growth. That also reduces the risk associated with investing in just one stock at a time when the markets remain volatile.

Thus, I believe PPA is and cost-effective way to invest in virtually every aspect of the coming defense boom.

This helps explain why it has recently been such a strong performer of late. So far this year, the S&P 500 is off close to 7%. By contrast, PPA is up nearly 9%.

In other words, this is the kind of foundational play that lowers your risk of buying individual stocks while at the time really building your net worth. It's a great place to start, too, in a market that's sluggish in many other sectors.

 LMT RTX PPA MRCY HXL HON RADA AAXN

See disclaimers here.

How did you like this article? Let us know so we can better customize your reading experience.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.