Few industries will look back on the last several years fondly, remembering a stretch of surging demand and reliable sources of organic growth. But for aerospace and defense firms, the last decade has been a remarkable run, including the last two years that saw many other corners of the economy battered by the recession. Ongoing -- and occasionally escalating -- initiatives in Iraq and Afghanistan have boosted bottom lines for manufacturers of weapons and defense systems. But the recent boom may now be drawing to a close, forcing this recession-proof sector to look elsewhere for expansion opportunities. "For the past decade, U.S. defense firms have enjoyed strong growth, as Pentagon budgets doubled to roughly $700 billion a year amid wartime spending," writes Nathan Hodge. "Now companies are bracing for a downturn and looking to foreign customers to cushion the blow."
Boeing
Lockheed Martin Corporation
Currently, the U.S. accounts for about 45% of global military spending (or about $1.57 trillion annually). Although the U.S. will continue to be a major player in the defense market, many analysts see that percentage gradually slipping over the coming decade.
While expansion into international markets is an excellent opportunity for U.S.-based firms, significant risks exist. Domestic manufacturers will likely find it difficult to break into markets that have military agreements with other nations or have political disagreements with Washington. U.S. firms are forbidden to export the F-22, the most progressive U.S. stealth fighter, and may not engage in weapon trade with Cuba, Iran, Syria, North Korea, and Burma. Moreover, competition from foreign providers is expected to be fierce.
Aerospace and Defense ETFs
The defense sector has long been seen as a "recession proof" industry that shrugs off economic downturns. Now this corner of the market faces a new challenge: expanding into new markets as expenditures on the homefront begin to decline. The ability of U.S. firms to achieve this objective will have a big impact on the ETFs profiled below [for more ETF ideas, sign up for our free ETF newsletter]:
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iShares
Dow Jones U.S. Aerospace & Defense ETF
(NYSE: ITA) : This ETF tracks the performance of the Dow Jones U.S. Select Aerospace & Defense Index, a benchmark that measures the performance of the aerospace and defense sector of the U.S. equity market. The largest individual holdings of ITA are in United Technologies (8%), Boeing (8%), General Dynamics (6%), and Lockheed Martin (6%), four companies that are looking to expand their market share in India and other international markets. ITA is up slightly on the year, and charges an expense ratio of 0.48% [see Wednesday's ETF To Watch: ITA]. -
PowerShares
Aerospace and Defense ETF
(NYSE: PPA) : This ETF tracks the performance of the SPADE Defense Index, a benchmark that includes companies engaged in the development, manufacturing, operations, and support of U.S. defense, homeland security, and aerospace operations. The fund's top holdings include Honeywell (7%), United Technologies (6%), Lockheed Martin (6%), and Boeing (5%). PPA charges an expense ratio of 0.60%.
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Disclosure: No positions at time of writing.
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