ETFs

Budget Cuts Could Hinder Aerospace & Defense ETFs

In the wake of the sovereign debt crisis in Greece, many of the world’s largest economies have pledged to hefty spending reductions painting a bleak picture for the aerospace and defense sector.

The world’s largest purchaser of weapons and aircraft, the United States, have already warned defense contractors Lockheed Martin (LMT) and Northrop Grumman (NOC) to prepare for a slowdown in orders as the Pentagon aims to trim spending in the coming years.  In fact, spending in Iraq has already dropped by one half as compared to 2009 and is expect to decline even further as the United States aims to reduce its presence in the Middle Eastern nation.

In Europe, a similar mood is being set as England has scaled down its order for the A400 military transport aircraft and is expected to cut its overall military budget between 10% and 25%.   Additionally, similar cuts are expected in France, Spain, Greece, Germany and Italy, with key projects being reassessed.

To put a further strain on the industry, funding of commercial aircraft could get more difficult as stimulus programs wind down and grants and other forms of aid are either drying up or being cancelled, with lack of cash and liquidity may make it difficult to finance future commercial orders.  This likelihood of increased funding constraints is expected to have a negative impact on both Boeing (BA) and Airbus, the world’s two largest airplane manufacturers. 

ETFs which will likely be impacted include:

  • PowerShares Aerospace & Defense (PPA), which includes Boeing, Honeywell (HON), Lockheed Martin and Northrup Grumman in its top holdings.
  • iShares Dow Jones US Aerospace & Defense (ITA), which holds 31 different aerospace and defense stocks with top holdings including Boeing, General Dynamics (GD) and United Technologies (UTX).

 If currently invested in these ETFs, it is important to protect one’s position through the use of an exit strategy which identifies specific price points at which downward price pressure is likely to occur.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

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