As the calls for ending the war become louder, I can't help but think what the consequences could be for some of America's largest defense contractors. As much as I don't want to see any potential cutbacks in defense spending put our troops at a disadvantage, it seems abundantly clear that some big cutbacks are on the horizon and that the indexes that track this sector are sure to go lower.
I was disturbed reading today about hints of these cutbacks to come, so I pulled up a couple of ETFs that track the sector and couldn't help but notice performance that has outpaced the general market averages by almost twofold. The first was the PowerShares Aerospace & Defense (PPA -AMEX ) which tracks the index called the SPADE(TM) Defense index. This ETF is trading just north of $22 with a performance year to date of 27.93% and one year total of 39.41%.
The second is the iShares Dow Jones US Aerospace & Defense (ITA -NYSE), which tracks the Dow Jones U.S. Select Aerospace & Defense index. This fund's trading performance is a little better, rising 30.62% year to date with a one year total return of 43.16%. This fund has a large weighting of almost 10% of one of my favorite stocks United Technologies (UTX-NYSE), but I believe this component's performance will not be enough to support the index's value.
Some components of this group have been characterized as evil "War Profiteers" and how exactly they benefited from today's sabre rattling and war-time policies has been exposed with amazing clarity. There exists well documented scrutiny of the group as well as complete disclosure of key figures close to the Bush administration and their involvement in the War profiteering crew. Personally, I don't believe everything the Bush bashers have to say, but I am also not naive.
Whether you view these companies that make up the defense and related services as providing necessary evils, or as inappropriate to a socially conscious portfolio because of the inherent evils that their products and services support, there can be just as much responsibility and satisfaction in profiting from a slowdown in their business, which could mean a slowdown in those same evils. Either way, I can't make the case for the bullishness that existed here a couple of years ago considering today's popular anti-war climate.
From a technical perspective these two funds look overdue for a correction, as is evident by their short-lived, long-term charts in the last couple of years. The Ishares fund looks like a better short based on the recent market correction, but the Spade Index fund looks just as appealing and has a more concentrated focus of defense companies that are more likely to be impacted by defense cutbacks than aerospace companies (the latter are better represented in the Ishares fund).
I would short both of them here for a longer term play to underperform the general markets in next year's pre-election anti-war rants.
Disclosure: I do not have a short position at the time of this post but will be looking to add positions on any near term rallies. I do not own an airplane, missile or bomb.
Photo:Carlos62, Creative Commons, Flickr