Playing Offense on Defense: Global Tensions Shape Trading Opportunities
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The aerospace and defense sector is drawing increased investor interest as recent geopolitical tensions heighten its relevance for traders.
With conflicts like the Russia-Ukraine war, escalating U.S.-China tensions, and unrest in the Middle East, the industry stands to gain from government defense spending and technological advancements. While Wall Street often favors growth, the aerospace and defense sector can be controversial. For example, many environmental, social, and governance (ESG) and values-based investors tend to avoid investing in companies involved in defense, weapons manufacturing, or any related military activities.
For short-term traders, though, the current environment presents potential opportunities.
Playing Defense During the Recent Volatility*
Aerospace and defense stocks as a group held up relatively well during the recent market freak-out when the CBOE Volatility Index (VIX)* popped above 60. The Dow Jones U.S. Select Aerospace & Defense Index* found support at its 50-day moving average*, at least for now.
Below is a daily chart of the Dow Jones U.S. Select Aerospace & Defense Index as of August 14, 2024.
Source: StockCharts.com, August 14, 2024.
Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.
The performance data quoted represents past performance. Past performance does not guarantee future results.
With geopolitical tensions rising around the globe, it’s not surprising it is one of the better-performing sectors as of late. The index includes some of the world’s leading defense contractors involved in missile systems, fighter jets, AI, and other defense technologies. The top stocks in the Dow Jones U.S. Select Aerospace & Defense Index include General Electric Co. (NYSE: GE), RTX Corp. (NYSE: RTX), Boeing Co. (NYSE: BA), and Axon Enterprise Inc. (NYSE: AXON).
Taking Off or Touching Down? Bull and Bear Points
Whenever geopolitical instability ramps up, it creates the potential for increased defense spending. For example, a record number of NATO members are hitting defense spending targets this year in response to the war in Ukraine, the Associated Press reported.
On the broader sector’s aerospace side, airlines are placing big orders for new aircraft as their fleet ages and they respond to rising travel after the COVID-19 pandemic.
Of course, there are also bearish arguments to be made on aerospace and defense stocks, including:
- Defense spending is reliant on government budgets, which could take a hit if the economy weakens.
- Networked defense systems need to constantly guard against cybersecurity threats.
- The sector is highly capital intensive and relies on rare metals, critical materials, and semiconductors that could face supply disruptions.
Trading the Bull Side with Leverage
For traders looking to profit from further potential upside in the sector, the Direxion Daily Aerospace & Defense Bull 3X Shares (Ticker: DFEN) is one option to consider. The ETF seeks daily investment results, before fees and expenses, of 300% of the performance of the Dow Jones U.S. Select Aerospace & Defense Index.
*Definitions and Index Descriptions
An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.
Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.
The Cboe Volatility Index (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500® Index (SPX℠) call and put options.
The Dow Jones U.S. Select Aerospace & Defense Index (DJSASDT) is provided by S&P Dow Jones Indices LLC (the “Index Provider”). The Index attempts to measure the performance of the aerospace and defense industry of the U.S. equity market. The Index Provider selects the stocks comprising the Index from the aerospace and defense sector on the basis of the float-adjusted, market capitalization-weight of each constituent. Aerospace companies include manufacturers, assemblers and distributors of aircraft and aircraft parts. Defense companies include producers of components and equipment for the defense industry, such as military aircraft, radar equipment and weapons.
One cannot invest directly in an index.
The “Dow Jones U.S. Select Aerospace & Defense Index” is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Rafferty Asset Management, LLC (“Rafferty”). Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Rafferty. Rafferty’s ETFs are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Dow Jones U.S. Select Aerospace & Defense Index.
Direxion Shares Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, Cash Transaction Risk, Passive Investment and Index Performance Risk and risks specific to the securities of the aerospace and defense industry and the industrials sector. Companies in the aerospace and defense industries, a component of the industrials sector, can be significantly affected by changes in government regulations and spending policies, economic conditions and industry consolidation. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.