XAR: Still The Best Aerospace & Defense ETF

The success of aerospace and defense companies rests not merely upon their research and development, their culture of innovation, and their quality of management – which might be good enough for most industries – but they also must deal with (1) politicians and (2) Department of Defense acquisitions protocols. This makes the survivors particularly capable.

I discussed the industry writ large at a bit more length in my article on the Global Defense Industry here: The Global Defense Industry - Here Are The Best To Buy.

In that article, I discussed both Elbit Systems (ESLT), which I own and Raytheon (RTN), which I have previously owned and for which I now have a buy limit order in place. I was unable to spend the time to get to my favorite ETF in that article. I did, however, speak directly to the problem defense contractors doing business in representative democracies must face: politicians. Politicians whose cozy jobs are safe as long as they bring home the bacon to their state or district. Here is a short hypothetical example from that original article of how that sends costs skyrocketing:

“Let’s say the U.S. military would like to have a certain capability, for instance, a long loiter-time safe distance robotic de-mining capability without putting human beings in harm’s way. The various companies within the defense industry see they could do well by doing good and they bid on the contract, detailing why their particular vision and capabilities to deliver the best product should win out. So far, so good. The Congress intervenes. The members’ basic question, no matter how cleverly they phrase it (or try to conceal it) is, ‘How much pork can I bring home to my district so I can get re-elected?’

“A capability deemed desirable by the military and able to be designed, prototyped, accepted and built by industry - with an eye on their bottom line - suddenly finds itself held hostage to the demands that function ‘x’ or part ‘y’ be made by a sub-contractor, not because the original bidder can’t do it themselves but because the sub-contractor is located in Congress critter ‘Z's’ home district.

“The result is pretty much a certainty that the de-mining robot will be built over budget and delivered late. Don’t get me wrong -- cutting-edge technologies requested by DoD materiel acquisitions officers may already be rife with too many conflicting add-ons. Industry may already recognize that their bid was so low that cost over-runs are necessary to finish the production, but they are confident the prototype will wow the audience enough to get a little extra funding. But it is members of Congress’ insistence that pork be larded to their districts that puts the whole thing over the edge.”

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Disclosure: Do your due diligence. If I can help, you are welcome to contact me directly about a subscription to Investors Edge® or about our portfolio management services.  e-mail joe [at] ...

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Daniel Charles 4 months ago Member's comment

Good article, thanks Joseph.