Though the fiscal cliff ordeal was somewhatsuccessfullyavoided, Washington has yet another hurdle to face in the coming months: budget talks. Back in January, the last minute dealcobbled together by Republican leader Mitch McConnell and Vice President Joe Biden raisedincome tax rates for those earning over $450,000. The tax hikes are expected to reduce the deficit by some $620 billion over 10 years, far less than Obama's $4 trillion in deficit reduction goal.Though the American public might have sighed in relief, government spending was one crucialelement that was not addressed in the New Year's deal .
Who Gets the Axe?Come March 1, 2013 an automatic round of roughly $65 billion in spending reductions will take place if Congress does not agree on fiscal budget. Should a bipartisan agreement not be reached, the following four main areas will be cut:
- Military spending cuts: $54.7 billion, or 7.5%
- Medicare: 2% cut in payments to providers
- Other Mandatory programs: 8% across the board cuts
- Other non-defense Discretionary programs: 8.4% cut
Aerospace & Defense ETFs: Caution AheadAs the threat of sequestration makes choosing the right investments difficult in the next few months, investors should keep a close eye on the industries that will be most affected by government budget cuts. Below, we highlight three aerospace and defense ETFs that may be in for a volatile ride in the near future:
- iShares Dow Jones U.S. Aerospace & Defense Index Fund : This ETF has roughly $80 million in total assets under managementand invests in a basket of about 35 individual securities. Top holdings include United Technologies (UTX), Boeing (BA) and Precision Castparts (PCP).
- PowerShares Aerospace & Defense : In terms of size, PPA is significantly smaller than the more popular ITA, though the fund does cast a wider net over the space with its portfolio of 50 aerospace and defense stocks. Industry giants Boeing (BA),Lockheed Martin (LMT) and Honeywell International (HON) account for roughly one-fifth of PPA's total assets .
- State Street SPDR S&P Aerospace & Defense ETF : Comprised of roughly 35 individual holdings, this ETF provides much more balanced exposure to the industry than ITA and PPA. Using an equal-weighted methodology, no individual stockreceivesmore than a 4.7% allocation. Top holdings include TransDigm Group (TDG), Spirit AeuroSystems Holdings (SPR) and Hexcel Corporation (HXL).