When investors think defensive, they tend to turn to consumer staples, real estate, and utilities. Indeed, these have been the S&P 500's best performing sectors over the past month, although they are still trading slightly lower, as trade tensions between the world's two economic superpowers – the United States and China – have reached a new level of intensity.

The aerospace and defense sector doesn't immediately come to mind as a "hideout" safe haven during times of market uncertainty, but it has the advantage of being partially uncorrelated with the global economy. Industry revenues remain more dependent on government spending budgets and growing threats of military conflict. In March, U.S. President Donald Trump proposed $750 billion for national defense in the 2020 federal budget, which represents a $34 billion increase, or about 5%, over what Congress enacted for fiscal year 2019.

From a valuation perspective, aerospace and defense components of the S&P 500 trade at roughly 14.9 times estimated 2020 earnings, offering a small discount to the multiple of 15.6 for the average S&P 500 company.

"We remain constructive on defense stocks and believe they are a good place to be," Morgan Stanley analyst Rajeev Lalwani wrote in a recent research report. "Growing sales visibility through the mid-2020s from a two-year budget deal pairs well with valuation amid uncertainty," Lalwani added, per Barron's.

Traders who want to position for a more "risk-off" environment as Washington and Beijing up the antes in an increasingly ugly trade war that threatens to derail global economic growth should consider exploring these three aerospace and defense exchange-traded funds (ETFs) that may provide some defense among the chaos.

iShares U.S. Aerospace & Defense ETF (ITA)

With an enormous $5.13 billion asset base, the iShares U.S. Aerospace & Defense ETF (ITA) seeks to provide similar investment results to the Dow Jones U.S. Select Aerospace & Defense Index – a benchmark comprising companies that manufacture, assemble, and distribute airplane and defense equipment. The fund's top two holdings in a basket of 35 stocks – The Boeing Company (BA) and United Technologies Corporation (UTX) – carry a cumulative weighting of nearly 40%. Dollar volume liquidity of over $30 million most days combined with a narrow 0.03% spread keep trading costs ultra-low. Although the ETF's management fee isn't cheap, it remains competitive for the segment. ITA offers a 1.07% dividend yield and has returned 22.97% year to date (YTD), outperforming the S&P 500 Index by 8% over the same period as of Aug. 7, 2019.

ITA shares staged an impressive 32% rally from their December 2018 low to their February high before retracing toward the 200-day simple moving average (SMA) in March. Since then, the ETF has oscillated within an orderly ascending channel. Price recently tried to push below the channel's lower trendline but found strong buying support at that level in yesterday's trading session. Traders who take a long position should consider taking profits near the channel's upper trendline and placing a stop below yesterday's low at $208.07.

Chart depicting the share price of the iShares U.S. Aerospace & Defense ETF (ITA)
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SPDR S&P Aerospace & Defense ETF (XAR)

The SPDR S&P Aerospace & Defense ETF (XAR) aims to broadly track the price and yield performance of the S&P Aerospace & Defense Select Industry Index. The underlying index consists of U.S. aerospace and defense companies, as defined by The Global Industry Classification Standard (GICS) – a standardized classification system for equities developed jointly by Morgan Stanley Capital International (MSCI) and Standard & Poor's. The ETF, which launched in 2011, differs from the benchmark by using a 40/40/20 weighting among large-, mid-, and small-cap stocks, respectively. XAR holds a basket of 30 stocks, with the top 10 allocations accounting for 43.30% of the portfolio. Nearly 125,000 shares change hands per day, providing traders with ample liquidity. As of Aug. 7, 2019, the fund has assets under management (AUM) of $1.62 billion, charges a competitive 0.35% management fee, and is trading 31.24% higher so far this year.

XAR has trended steadily higher since the 50-day SMA crossed above the 200-day SMA in mid-March to generate a "golden cross" buy signal. The price fell below crucial support at $100 on Monday, Aug. 5, before staging an intraday reversal to close above that level. The rejection below this area may trigger further buying in coming days as swing traders look to buy the pullback. Those who have an open trade should set a take-profit order near $110, where the price may encounter resistance from a trendline sitting above recent peaks. Think about protecting trading capital with a stop order positioned under yesterday's candle low at $101.31.

Chart depicting the share price of the SPDR S&P Aerospace & Defense ETF (XAR)
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Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN)

Created in 2017, the Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN) attempts to provide three times the daily return of the Dow Jones U.S. Select Aerospace & Defense Index. For example, if the benchmark index returns 1%, the ETF aims to return 3%. Traders should be aware that the fund's performance may deviate from the advertised leverage due to compounding and daily rebalancing. Consequently, the ETF suits short-term trading rather than buy-and-hold investing. The fund is geared exposure to industry heavyweights, such as Boeing, United Technologies, and Lockheed Martin Corporation (LMT), and it works perfectly for those who want an aggressive bullish bet on leading aerospace and defense players. Consider using limit orders to combat the fund's slightly higher 0.17% average spread and middling liquidity. DFEN manages net assets of $56.33 million, has an expense ratio of 0.98%, and is up 71.15% YTD as of Aug. 7, 2019.

DFEN tacks the same underlying index as ITA; therefore, the two charts look similar. A pullback to the lower trendline of an ascending channel and 200-day SMA provides an excellent risk/reward trading opportunity. The relative strength index (RSI) sits below 50, giving the price plenty of room to test higher prices before consolidating. Those who take a long position should look for a retest of the October 2018 high at $64.16 and protect downside with a stop-loss order just below yesterday's low at $48.93. The trade offers a 1:7 risk/reward ratio ($13.34 profit target / $1.90 stop loss), assuming a fill at yesterday's $50.82 closing price.

Chart depicting the share price of the Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN)
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