Investors play offense with defense-focused stocks

Rise of aerospace-and-defense sector has eclipsed that of utilities stocks in recent months as investors bet on national defense.

  • By Corrie Driebusch,
  • The Wall Street Journal
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The U.S. may have held off on an airstrike against Iran in favor of sanctions, but U.S. stock investors are decidedly choosing aerospace and defense.

This year, investors have been on the offense when it comes to buying the defense sector’s stocks. The SPDR Aerospace & Defense Exchange Traded Fund is up 30% in 2019, roughly twice that of the Utilities Select Sector SPDR Fund (XLU). Utilities are an attractive portfolio destination for investors seeking a “defensive” position.

In the past month, the disparity has been more striking—the aerospace/defense ETF’s gains are nearly three times that of utilities. Thanks to this surge, now the defense stocks have nearly caught up with utilities over the past 12 months after a brutal selloff to close out 2018.

Among the best performers in recent weeks are well-known defense contractors Lockheed Martin Corp. (LMT) and Northrop Grumman Corp. (NOC), while smaller Kratos Defense & Security Solutions Inc. (KTO), which provides technology to the Defense Department, and Axon Enterprise Inc. (AAXN), maker of Tasers and body cameras, have also soared.

Part of the bullishness stems from a bigger budget for national defense. In late May, the Senate Armed Services Committee voted to advance the National Defense Authorization Act for 2020. The committee’s markup of the act, which specified dollar amounts, included $750 billion in funding for national defense. One apparent beneficiary was Kratos, according to some analysts, who noted spending that appeared to be related to Kratos’ Valkyrie drone.

The belief that the aerospace-and-defense industry stands to benefit from big U.S. government spending has helped the ETF rise even as one of its big components has stumbled. Boeing Co. (BA), the largest company in the ETF by market capitalization, has risen in recent weeks, but its May tumble on concerns about the safety of the company’s 737 MAX have kept shares at a loss of 1.9% since the end of March.

Meanwhile, utilities stocks, while up in recent weeks as interest rates touch fresh multiyear lows, can’t keep up in 2019. The Utilities Select Sector SPDR Fund was little changed on Monday, while the SPDR S&P Aerospace & Defense ETF (XAR) slipped 0.2%.

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