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Geopolitical risks have been rising as North Korea refuses to stop its threats. Moreover, with countries expanding their weapons system, defense stocks have been rallying lately.


Is North Korea Driving Defense ETFs?


On Sep 3, North Korea conducted its sixth nuclear test of a hydrogen bomb, which can be mounted on an intercontinental ballistic missile. Kim Jong-Un’s actions have created quite a stir in the United States and a number of Asian economies (read: Safe Haven Currency ETFs Gain, Dollar Loses Amid Geopolitical Uncertainty).


Per a Bloomberg article, the state-run Korean Central News Agency citing a statement by the Korea Asia-Pacific Peace Committee said on Thursday, “Japan is no longer needed to exist near us.” The statement further added, “The four islands of the archipelago should be sunken into the sea by the nuclear bomb of Juche”.


Han Tae Song, North Korea's ambassador to the UN, told a UN conference, "The forthcoming measures by DPRK (the Democratic Republic of Korea) will make the US suffer the greatest pain it has ever experienced in its history."


These threats come as UN passed new sanctions on North Korea. The sanctions are aimed at starving North Korea of oil to run its nuclear program by reducing oil imports by the country. Although the United States aimed at total oil embargo on North Korea, sanctions were watered down in order to secure China and Russia’s support, as they held veto power on the decision.


North Korea has received repeated warnings from the United States, that if it does not stop its nuclear tests, it will have to face significant military response. As a result, major nations have started focusing on their defense systems in order to prepare for any mishap.


Strong Fundamentals


The earnings performance for the sector has been impressive in the second quarter and is expected to continue in the third quarter as well. Moreover, a majority of companies from the sector beat earnings and revenue expectations in the second quarter (read: Here's an ETF to "Make America Great Again").


The S&P Aerospace & Defense Select Industry Index is up 19% year to date compared with 11.6% increase for the S&P 500. Moreover, the Senate passed a motion on Sep 11 allowing the $696.5 billion National Defense Authorization Act to move forward.


We will now discuss a few ETFs focused on providing exposure to the Aerospace and Defense sector.


iShares U.S. Aerospace & Defense ETF (ITA - Free Report)


This fund seeks to provide an exposure to the aerospace and defense industry. It has AUM of $4.10 billion and charges a fee of 44 basis points a year. The top three holdings for the fund are Boeing (BA - Free Report) , Lockheed Martin Corp (LMT - Free Report) and United Technologies (UTX - Free Report) with 11.14%, 7.72% and 7.35% allocation, respectively (as of Sep 12, 2017). The fund has returned 33.8% in a year and 18.8% year to date (as of Sep 13, 2017). It currently has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: ETFs to Profit if UTX-Rockwell Deal Sees the Light of Day).


SPDR S&P Aerospace & Defense ETF (XAR - Free Report)


This fund has AUM of $846.69 million and charges a fee of 35 basis points a year. The top three holdings for the fund are Spirit AeroSystems Holdings Inc. Class A (SPR - Free Report) , Boeing and Rockwell Collins Inc. (COL - Free Report) with 4.57%, 4.48% and 4.41% allocation, respectively (as of Sep 12, 2017). The fund has returned 33.1% in a year and 17.4% year to date (as of Sep 13, 2017). It currently has a Zacks ETF Rank #1 with a Medium risk outlook.


PowerShares Aerospace & Defense Portfolio ETF (PPA - Free Report)


This fund has AUM of $728.5 million and charges a fee of 61 basis points a year. The top three holdings for the fund are Boeing, Lockheed Martin Corp and Honeywell International Inc (HON - Free Report) with 7.66%, 6.92% and 6.58% allocation, respectively (as of Sep 12, 2017). The fund has returned 29.6% in a year and 16.9% year to date (as of Sep 13, 2017). It currently has a Zacks ETF Rank #1 with a Medium risk outlook.


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