How Defense Spending Shifts Impact ETFs

Defense Secretary Robert Gates wants a new agenda for defense spending, and it has less to do with F-22’s and helicopters and is focused upon updating the systems that keep defense plants running. This could help or hurt related exchange traded funds (ETFs), depending on how the money is spent.

A major makeover within the nation’s defense systems would mean Pentagon chief would slash many giant weapons programs, and dissolve the thousands of jobs that go with them, reports Anne Gearan for the Associated Press. The contractors who are protecting their jobs are adding fuel to the fire, says Steve Chiotakis for MarketPlace. Gates’ proposed $534 billion budget for the coming year would face several cuts, and Congress may not approve.

Overall, aerospace and defense equities reflect concerns over demand for air travel and the trajectory of the U.S. defense budget following a wind-down in Iraq. Backlogs, solid balance sheets and smaller enterprises should allow many firms to manage the risks involved. The aerospace and defense group modestly underperformed the broader market over the past five trading days, shedding 1.4% in market value versus a small 0.2% increase in the S&P 500 (^GSPC), reports Howard A. Rubel for Barron’s.

• iShares Dow Jones Aerospace & Defense (ITA): down 11.5% year-to-date

• PowerShares Aerospace & Defense (PPA): down 10% year-to-date

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