How Can You Play This Arms Race?

The United Nations and other allied states around the world have been supporting Ukraine with military supplies since the very early days of the war. With the war in Europe still raging more than a year after it began, allied munitions stockpiles and military supplies are starting to get thin.

But, at some point, these countries' reserves will reach a depleted level they are no longer comfortable with and be forced to restock. Let's be honest; that point has already come and gone.

So today, countries in Europe and America are not only still giving Ukranie military aid, but also replacing their arms.

But something similar is also occurring in Asia, as China continues with aggressive talk pertaining to Taiwan. Furthermore, China has been heavily spending on its own military and set its defense spending growth at 7.2% in 2023, in line with where it was in 2022.

Even here in the U.S., the projected 2024 budget for defense spending came in at $842 billion, or $26 billion higher than where it was in 2023 and more than $100 billion higher than in 2022.

Even if the war weren't taking place in Europe today, there would likely be an arms race around the world, and many believe it will only get worse since geopolitical tensions are still brewing in Asia.

So, how can you play this arms race?

Buy Defense and Aerospace Exchange Traded Funds and relax.

Not sure which ones to buy? Let's take a look at a few.

The first ETF I would look at is the iShares U.S. Aerospace & Defense ETF (ITA).

ITA is the largest Defense and Aerospace ETF, with just over $6 billion in assets under management. ITA also has a reasonable expense ratio at 0.39% and has had a solid performance over the last few years. ITA is up 4.32% year-to-date but more than 14.9% annualized over the previous three years. ITA also has 100% of its assets invested in U.S. companies and has 37 holdings.

The next ETF I would look at is the Invesco Aerospace & Defense ETF (PPA).

PPA is the second largest defense ETF by assets under management with $1.9 billion. PPA's expense ratio is a little higher at 0.61%. PPA also has a small percentage of its holdings from outside the U.S. PPA has also performed well year-to-date with a gain of 4.6%, and it is up 7.79% annualized over the last five years and 15% annualized over the previous ten years.

Next, we have the SPDR S&P Aerospace & Defense ETF (XAR) with $1.5 billion in assets is slightly smaller than PPA.

XAR has 34 holdings, all of which are based in the U.S. and has the lowest expense ratio yet at just 0.35%. XAR's performance is also about the same as PPA and ITA, so don't tell yourself the lower fee means worse performance. Out of the vanilla Aerospace and Defense ETFs, XAR is probably the best, simply because it is the cheapest.

The other two ETFs I would look at are the ARK Space Exploration & Innovation ETF (ARKX) and the leveraged Direxion Daily Aerospace & Defense Bull 3X Shares ETF (DFEN).

Cathy Wood led ARKX ETF combined defense, aerospace and space exploration stocks together since so many have a lot in common or sell products in two or even all three industries. However, the ARKX fund charges 0.70% expense ratio and doesn't have the best performance during its short history.

The DFERN fund isn't any less risky since it is three times leveraged ETF. DFEN tracks the DJ US Select Aerospace and Defense index but will move three times the magnitude. Furthermore, DFEN charges an 0.97% expense ratio and should only be held daily. DFEN is up 9.54% year-to-date but down 16% annualized over the last five years.

Unfortunately, this is our world, where war rages, and arms races are never-ending.

But since this is where we are, you may want to make money on it, and the above ETFs are a few ways you can do so.

Matt Thalman Contributor
Follow me on Twitter @mthalman5513

Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.