The world isn’t getting any safer and as long as that remains the case, there is going to be demand for defense companies and the products they manufacture. Defense stocks tend not to be as glamorous as tech stocks but provide reliable revenue and income. Defense stocks tend to be stable contributors to an income-focused portfolio, with predictable long-term revenue streams that translate into solid dividends.
The aerospace and defense industry plays a vital role in the global economy by supporting and facilitating passenger transportation, trades, logistics, security and defense. The industry consists of several players servicing both commercial and military operations across the value chain. These players include aircraft manufacturers such as Boeing and Airbus; part manufacturers such as GE Aviation, Lockheed Martin, BAE Systems and Rolls-Royce Holdings; and Maintenance, Repair and Overhaul (MRO) organisations which are the aftersales service providers. The majority of these large firms are located in the United States of America which accounts for 49% of the total industry value.
Figure 2: Space economy and its subsectors/themes forecast up to 2040
Source: Morgan Stanley Research, Haver Analytics
According to Morgan Stanley (MS), the current market value of the space economy is $350 billion and is expected to grow to $1 to 1.5 trillion in 2040 or a 5,3% annual compounded growth rate over the 20-year period from 2020 to 2040.
The figure 3 shows the annual average US military spending by war vs US military aid to Ukraine (in $bn’s). It is astonishing to see that the aid to Ukraine exceeds America’s spent in the Afghanistan war. Important to note, military aid does not include weapons and equipment.
No one of the defense contractors gives exposure to the entire industry. Therefore, it might make more sense to invest in the defense sector through an exchange-traded fund (ETF). As a result, we prefer to have exposure to the aerospace and defense sector via the iShares U.S. Aerospace & Defense ETF (ITA), which is also the largest ETF focused on defense, with $4.7 billion in net assets as of early December 2022. This ETF is designed to provide exposure to domestic United States aerospace and defense companies, as well as exposure to the commercial aerospace industry.
Figure 4: iShares U.S. Aerospace & Defense ETF (ITA) top 10 holdings (%)
