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Election season is just around the corner in the U.S. and the country's deep fiscal hole remains a political hot potato. If the U.S. Congress drags its feet again and does not meet a definitive agreement on the fiscal budget, aerospace and defense exchange traded funds will likely see turbulence.

Congress has until Jan. 1, 2013 to make things right or else a mix of tax hikes and $1.2 trillion in budget cuts are set to go off, reports Stacy Curtin for the Daily Ticker.

The aerospace and defense sector witnessed a similar scare last year when Congress dawdled ahead of raising the debt ceiling, which led to S&P's downgrade on U.S. sovereign debt.

Most economists estimate that without an answer to the country's budget, there will be a $600 billion hole in the economy in 2013.

The defense sector would likely take the brunt of the hit, accounting for half of the budget cuts. About $500 billion in defense spending would be phased out over the next 10 years, with $55 billion immediately cut next year.

In a recent study conducted by National Association of Manufacturers, over 1 million private sector jobs could disappear by 2014 due to the poor fiscal budget. The job loss would translate to a 0.7% rise in unemployment and up to a 1% drop in GDP.

Lockheed Martin (NYSE:LMT) has already warned that the majority of its 100,000 workforce is at risk due to federal budget cuts to defense. Additionally, other defense companies will also likely diminish their workforce in light of the constrained budget.

  • iShares Dow Jones US Aerospace & Defense (NYSEARCA:ITA). Top holdings include: United Technologies 8.9%, Boeing 8.2%, Precision Castparts 6.1%, Lockheed Martin 5.9% and raytheon 5.6%
  • PowerShares Aerospace & Defense (NYSEARCA:PPA). Top holdings include Boeing 6.0%, United Technologies 5.6%, Honeywell International 5.5%, Lockheed Martin 5.3% and Raytheon 5.1%.

Max Chen contributed to this article.

Source: Aerospace And Defense ETFs Face U.S. Fiscal Cliff