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

Already, companies in these industries are feeling the pressure as the potentially severe budget cuts will have material impact on bottom line returns. Defense manufacturing giant Lockheed Martin (LMT) has already reported a slide in net profit for the fourth quarter of last year after the company was forced to slow production and cut several hundred jobs when the U.S. government cut the number of F-35 jet fighters it plans to buy .

Aerospace & Defense ETFs: Caution Ahead

As 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).

Disclosure: No positions at time of writing.

Related Articles
  1. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Economics

    Long-Term Investing Impact of the Paris Attacks

    We share some insights on how the recent terrorist attacks in Paris could impact the economy and markets going forward.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center