Defense ETFs Largely Follow The Budget

Defense and Aerospace exchange-traded funds or ETFs usually but not always follow the big bucks from Washington. Joanne Von Alroth of IBD describes how defense contractors have seen strong profits as a result of increased defense spending. The 2006 U.S. defense budget was $442 billion with $79 billion of that for equipment acquisitions and $70 billion for research and development. President Bush has already requested a 15% increase in defense spending in 2007. Over the next two years, analysts project the defense budget will rise an additional 4.7% annually.

But the competition for these contracts is intense with a complex mix of consultants and contractors fighting for the resources. Two exchange traded funds in particular have performed solidly in this hawkish atmosphere: iShares Dow Jones U.S. Aerospace Fund (NYSE:ITA) and PowerShares Aerospace & Defense Fund (AMEX:PPA). Both list the nation's 20th largest manufacturer, United Technologies (NYSE:UTX), as their largest holding.

Of its 33 holdings, the iShares fund has 9.23% in United Technologies. Of its 57 holdings, the PowerShares fund has 6.88%. Lockheed Martin and General Dynamics are two other big holdings in both ETFs.