3 Defense ETFs to Trade North Korean Uncertainty

Uncertainty over North Korea and the U.S. government's commitment to increase military spending continues to keep a rocket under defense stocks. The Standard and Poor's (S&P) Aerospace & Defense Select Industry Index is up 6.95% year to date as of May 2018. This compares with a return of just 1.78% for the S&P 500 Index over the same period.

The world waits patiently as political jostling continues between Washington and Pyongyang about the proposed June 12 summit between President Trump and North Korean leader Kim Jong-un in Singapore. Even if the summit goes ahead, many analysts remain skeptical about the prospect of Kim completely dismantling North Korea's nuclear weapons program.

Investors who want exposure to the defense sector in these times of U.S./North Korean geopolitical uncertainty and increased defense spending should consider adding one of these three exchange-traded funds (ETFs) to their portfolio. (See also: How Military Spending Affects the Economy.)

SPDR S&P Aerospace & Defense ETF (XAR)

The SPDR S&P Aerospace & Defense ETF launched in 2011 and seeks to replicate the returns of the S&P Aerospace & Defense Select Industry Index. The fund does this by investing the majority of its assets in securities that make up the benchmark index, such as stocks in the aerospace and defense sectors. The fund's top five holdings account for 19% of its portfolio. These holdings are Axon Enterprise, Inc. (AAXN), TransDigm Group Incorporated (TDG), AeroVironment, Inc. (AVAV), Textron Inc. (TXT) and HEICO Corporation (HEI).

The SPDR S&P Aerospace & Defense ETF has assets under management (AUM) of $1.35 billion. It has a low expense ratio of 0.35%, which compares with the category average of 0.46%. As of May 2018, the fund has a year-to-date (YTD) return of 7.11%, but it has also performed well over the longer term, with a five-year annualized return of 20.68%. (For more, see: What Will Trump's Defense Boost Do for Stocks?)

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

Created in 2006, the iShares U.S. Aerospace & Defense ETF aims to match the returns of the Dow Jones U.S. Select Aerospace & Defense Index. It attempts to achieve this by investing a minimum of 90% of its AUM in securities that comprise the underlying index. These are securities of companies that manufacture, assemble and distribute aircraft and aircraft parts. The Boeing Company (BA) is the fund's top holding with a weighting of 11.19%. Other key holdings include United Technologies Corporation (UTX) at 7.55% and Lockheed Martin Corporation (LMT) at 6.92%.

The iShares U.S. Aerospace & Defense ETF is the largest defense fund in its category, with $6.03 billion in net assets. The fund’s three- and five-year annualized returns are 18.82% and 21.59%, respectively. As of May 2018, the ETF is trading at $201.24, which is at the top end of its 52-week trading range between $155.02 and $207.27. ITA pays a dividend yield of 0.95% and has an expense ratio of 0.44%. (See also: Defense Stocks Back in Play After Iran Retreat.)

Invesco Aerospace & Defense ETF (PPA)

The Invesco Aerospace & Defense ETF formed in 2005 and attempts to provide similar returns to the SPADE Defense Index. To do this, the fund invests in constituents of the benchmark index. These are companies that develop, manufacture, operate and support defense, military and aerospace operations. PPA has 52 stocks in its portfolio. The ETF's top three holdings of Boeing, Honeywell International Inc. (HON) and United Technologies have a cumulative weighting of 21.67%.

The Invesco Aerospace & Defense ETF is the most expensive of the three funds discussed, with an expense ratio of 0.61%. It is similar in size to XAR, with AUM of $1.03 billion. This average-rated-risk fund has a five-year annualized return of 19.95%, a three-year annualized return of 17.5% and a YTD return of 6.5% as of May 2018. (For additional reading, check out: Play Defense with Boeing, 3 Other Military Stocks.)

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