If you have ethical reservations about investing in the defence sector, this article may not be for you. However, if you’re open to exploring this area, defence stocks are particularly noteworthy this year.
Given the ongoing geopolitical tensions – over two years of war in Ukraine, the persistent conflict between Israel and Gaza, and substantial U.S. military funding – it’s no surprise that defence is a robust sector.
The performance of defence stocks during times of global unrest is well-documented. Here are a few studies that illustrate this point:
- “The Budgets of Wars: Analysis of the U.S. Defense Stocks in the Post-Cold War Era”
- “The 11/13 Paris Terrorist Attacks and Stock Prices: The Case of the International Defense Industry”
- “Does Geopolitical Risk Predict Stock Returns and Volatility of Leading Defense Companies? Evidence from a Nonparametric Approach”
For those new to this sector, the following overview will introduce you to the three biggest U.S. defence contractors, including what weaponry they produce that is being used in conflicts today.
Additionally, I will highlight an exchange-traded fund (ETF) pick that provides exposure to the entire industry, offering a comprehensive way to invest in defence with a single purchase.
RTX
RTX Corporation (NYSE: RTX), formerly known as Raytheon Technologies, is a major defence contractor known for its extensive range of military technology and equipment.
Among its well-known products are the Patriot air defence system and Tomahawk cruise missile, both of which are staples in modern military arsenals.
RTX also produces the Advanced Medium-Range Air-to-Air Missile (AMRAAM), Paveway laser-guided bombs, and a variety of radar systems for surveillance and missile defence.
Lockheed Martin
Lockheed Martin (NYSE: LMT) produces the F-35 Lightning II, the most sophisticated stealth fighter jet currently in use, capable of multiple combat roles.
Lockheed Martin also manufactures the C-130 Hercules, a versatile military transport aircraft, and the PAC-3 Missile, essential for modern missile defence systems.
Additionally, Lockheed produces the AGM-114 Hellfire, a precision-guided missile used by a variety of ground and air platforms for anti-armour and precision strike missions.
General Dynamics
General Dynamics (NYSE: GD) is known for the Virginia-class submarines, which are highly advanced nuclear-powered submarines designed for deep-sea and anti-submarine warfare.
General Dynamics also produces the M1 Abrams tank, the main battle tank used by the United States military, renowned for its powerful armament, mobility, and heavy armour.
Additionally, the company manufactures the Stryker, a family of armoured fighting vehicles that offer significant versatility and mobility for infantry troops in various combat scenarios
The ETF I would buy
Investing directly in U.S. defence companies involves dealing with USD transactions, which can lead to costly currency conversion fees.
Additionally, investing in just these three stocks does not provide broad diversification, which is crucial for managing investment risk.
My recommendation for those looking to invest in this sector would be the iShares U.S. Aerospace & Defense Index ETF (TSX: XAD), which charges a 0.44% management expense ratio.
This ETF not only includes RTX, Lockheed Martin, and General Dynamics, but it also comprises 31 other companies within the aerospace and defence sector by tracking the Dow Jones U.S. Select Aerospace & Defense Index.
