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Defense ETFs in Focus as Trump Proposes to Raise 2020 Budget

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President Trump is expected to announce plans for a $750 billion defense budget for fiscal 2020. This move comes after significant lobbying from congressional Republicans and Defense Secretary Jim Mattis. Apparently, they believed that President Trump’s previously proposed $700 billion military spending plan was contrary to the administration’s national security build up and a threat as well.

The news of the proposed hike being suggested by the President comes as a contradiction to his earlier pledge of trimming defense spending. In October, Trump said that the defense figure for 2020 will be $700 billion, a roughly 5% cut with decrease planned for other agencies.  

He also tweeted on Dec 3, that a $716 billion Defense Department budget for fiscal 2019 is “crazy.” He added that some time in the future, together with China’s and Russia’s president, plans of putting a halt to the uncontrollable arms race need to be discussed. On Aug 13, President Trump gave the final nod to the defense budget for fiscal 2019.       

Mattis and others have been arguing for long that several years of military underfunding have left readiness and modernization priorities unattended. However, this new budget could please the defense hawks, who generally vouch for a 3-5% hike in spending annually.

President Trump’s inflated proposal is significantly higher than the $733 billion which Pentagon has been fighting for. Per Trump, the hiked proposal is likely to act as a “negotiating strategy” which will ensure that the Democrats fail to push the final budget below the Pentagon’s initial target of $733 billion (read: Aerospace & Defense ETFs: Can the Outperformance Continue?) .

Future Outlook

After the increased proposal was suggested by the President, Office of Management and Budget (OMB) head Mick Mulvaney — a past critic of out-of-control military budgets swiftly ordered Defense Budget planners to revise their submissions. This work is likely to get completed by late December or early January of 2019, in preparation for the February release of the president’s full federal budget request.

After the February release, House and Senate appropriators will debate the budget numbers over spring and summer, with the hope of reaching a final spending agreement by the start of next fiscal year on Oct 1.

Defense ETFs in Focus

With all the above developments in context, it seems a prudent choice to bet on the sector with the following ETFs (see: all the Industrials ETFs here):

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

This fund provides exposure to U.S. companies that manufacture commercial and military aircraft and other defense equipment by tracking the Dow Jones U.S. Select Aerospace & Defense Index. It comprises 36 holdings. The fund’s AUM is 4.9 billion and expense ratio is 0.43%.

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

The fund seeks to track a modified equal-weighted index, which provides the potential for unconcentrated industry exposure across large, mid and small-cap stocks. It comprises 33 holdings. The fund’s AUM is $1.5 billion and expense ratio is 0.35% (read: Trump's Presidential 2 Years: Must-See ETF Areas).

Invesco Aerospace & Defense ETF (PPA - Free Report)

The Invesco Aerospace & Defense ETF is based on the SPADE Defense Index. The index comprises 50 companies that are mainly engaged in the research, development, manufacture, operation and support of defense, military, homeland security and space operations. The fund has AUM of $864.1 million and expense ratio of 0.61%. It comprises 52 holdings.

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