As investors continue to seek diversification, the aerospace and defense sector may be the answer to adding diversification and for good reason.
Recently, the Obama administration stated that spending on defense will not be drastically reduced in the coming years. In fact, President Obama’s budget includes more money going to the Pentagon in the next eight years than any other administration since World War II.
One major reason for this surge in defense spending is that the United States needs to upgrade military equipment abroad in order to sustain its global military presence and strength. A second reason supporting this increased budget is the fact that the majority of military goods are made in the United States and increased spending in this sector could result in job creation and eventually a spark to a battered economy. Thirdly, the wars that the United States are engaged in around the world are not likely to end anytime soon, a notion further supported by the Obama administration decision to send an additional 30,000 troops to Afghanistan.
In addition to support from the Obama administration, the defense sector is known for its relative stability, which further bolsters its attractiveness to certain investors.
As for the aerospace industry, industry insiders have indicated that production is escalating predicting 30,000 new aircraft to hit the market over the next 20 years. This production increase is being driven by outdated fleets, the desire of aircraft carriers to include more fuel efficient airplanes and an uptick in business, freight and leisure travel, which will all bode well for companies like Boeing (NYSE:BA) and Airbus. In fact, Boeing is up nearly 25% year-to-date and closed at $72.42 on Friday.
Some diversified ways to play aerospace and defense include the following:
· PowerShares Aerospace and Defense (NYSE:PPA), which boast defense contractors like Lockheed Martin (NYSE:LKM) and L-3 Communication (NYSE:LLL). PPA also boasts aerospace giants Honeywell (NYSE:HON) and Rockwell Collins (NYSE:COL). PPA closed at $18.84 on Friday.
· iShares Dow Jones US Aerospace & Defense (BATS:ITA), which includes holdings like General Dynamics (NYSE:GD) and United Technologies (NYSE:UTX). ITA closed at $58.10 on Friday.
Although an opportunity seems to exist in the aerospace and defense industry, it is equally important to keep in mind the inherent risks involved with investing in equities. To help protect against these risks, the use of an exit strategy which identifies a price point at which an upward trend in these equities could come to an end is of utmost importance.
According to the latest data at www.SmartStops.net, an upward trend in Boeing could come to an end at $69.56. As for the other mentioned equities, an upward trend could come to an end at the following price points: PPA at $18.51 and ITA at $56.73. These price points fluctuate on a daily basis and are reflective of market volatility. Updated data can be found at www.SmartStops.net.