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Mergers & Deals to Boost Defense Sector: 3 Fund Winners

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U.S. defense sector is set for gains ahead, owing to a merger between Raytheon and United Technologies and a new defense deal with India.

Such developments will surely boost defense and aerospace companies’ bottom line. Therefore, choosing a few mutual funds that invest in the same seems prudent at present. 

Raytheon, United Tech Merger to Boost Defense and Aerospace

On Jun 9, defense contractor Raytheon and United Technologies announced that both companies would merge in an all-stock agreement to form Raytheon Technologies Corporation. The deal is expected to close in the first half of 2020.

The companies said that they would have combined sales of $74 billion on an annualized basis, which makes Raytheon Technologies the second-largest aerospace and defense company in the United States after Boeing in terms of revenues, per a CNBC report.

The new company will focus on areas such as hypersonic and future missile systems, directed energy weapons, intelligence, surveillance, and reconnaissance in contested environments and more, the companies said in the release.

Undoubtedly, the new company’s technological capabilities will be a combination of Raytheon and United Technologies. This would not only be highly beneficial for their customers, but also allow the company to invest in advanced technologies in the aerospace and defense segment through business cycles.

United Technologies' Pratt & Whitney manufactures jet engines for Boeing and Airbus. Pratt & Whitney also manufactures engines for Lockheed Martin’s F-35 stealth fighter. These companies are bound to get a boost from the merger as well.

U.S.-India Deal Good News for Domestic Defense Players

In addition to the Raytheon-United Technologies merger, a newly approved deal with India could propel America’s defense companies as well. According to the Trump administration’s approved deal, the Asian company will buy armed drones and integrated air and missile defense systems from America amounting to more than $2.5 billion.

India was granted Strategic Trade Authorization tier 1 status in 2018, which means that the country has license-free access to extensive military and dual-use technologies under the Commerce department’s radar. India recently purchased MH-60R Seahawk helicopters, Apache helicopters and P-8I maritime patrol aircraft from U.S. The country is evaluating the purchase of Lockheed Martin F-21 and Boeing F-18/A at present.

This deal could be highly beneficial for companies such as Lockheed Martin, Boeing, Raytheon and General Dynamics.

Our Choices

To make the most of the Raytheon-United Technologies merger and the prospect of India buying defense systems from the United States, we have selected three mutual funds that invest in U.S. defense and aerospace companies.

These funds carry a Zacks Mutual Fund Rank #1 (Strong Buy). Moreover, these funds have encouraging three-year returns. Additionally, the minimum initial investment is less than $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.

Now we come to the second-most vital question: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

Fidelity Select Defense & Aerospace Portfolio (FSDAX - Free Report) fund aims for capital growth. The fund invests the majority of its assets in securities of companies engaged in research, manufacture, or marketing of products or services related to the defense or aerospace industries. The non-diversified fund mostly invests in common stocks.

This Zacks sector – Other product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FSDAX has an annual expense ratio of 0.75%, which is below the category average of 1.01%. It has a three-year return of 18.9%.The fund has minimum initial investment of $2500.

Fidelity Select Industrials Portfolio (FCYIX - Free Report) fund aims for capital growth. The non-diversified fund invests most of its assets in securities of companies that are engaged in research, development, manufacture, distribution or marketing etc of industrial products, services or equipment. It invests in U.S. and non-U.S. issuers alike. The fund invests in companies such as United Technologies, Raytheon, General Dynamics and Northrop Grumman etc.

This Zacks sector – Other product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

FCYIX has an annual expense ratio of 0.76%, which is below the category average of 1.01%. It has a three-year return of 9.4%.The fund has minimum initial investment of $2500.

Vanguard Dividend Growth Fund Investor Shares (VDIGX - Free Report) mostly aims for an income that grows with time. The fund also aims for capital growth and current income. VDIGX invests the majority of its assets in high-quality companies that have prospects for long-term total returns. The fund mostly invests in stocks that offer current dividends. The fund invests in companies such as United Technologies, Lockheed Martin and General Dynamics etc.

This Zacks sector – Large Cap Blend product has a history of positive total returns for more than 10 years. To see how this fund performed compared in its category, and other 1 and 2 Ranked Mutual Funds, please click here.

VDIGX has an annual expense ratio of 0.22%, which is below the category average of 0.94%. It has a three-year return of 12.3%.The fund has minimum initial investment of $3000.

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