Play Offense With This Defense ETF

Last week was a good week to be long aerospace and defense equities or the related exchange traded funds with multiple catalysts boosting the fortunes of the aerospace and defense arena, including Northrop Grumman Corporation NOC acquisition of Orbital ATK Inc. OA for $7.2 billion.


That is the second large-scale acquisition announced in the aerospace and defense industry just this month, following United Technologies Corporation's UTX $23 billion acquisition of Rockwell Collins, Inc. COL


News that the U.S. Senate is on track to pass a defense policy bill that would pump $700 billion into the Pentagon's budget also drove several aerospace and defense ETFs to record highs, including the Direxion Daily Aerospace & Defense Bull 3X Shares DFEN ">)).


Good Timing


Some new ETFs are afflicted with poor timing. The opposite is true of DFEN, which debuted in May as the first and still only leveraged ETF dedicated to the aerospace industry. Aerospace stocks have been surging since President Donald Trump took office, underscoring the point that DFEN was a well-timed new ETF.


The leveraged defense ETF looks to deliver triple the daily returns of the Dow Jones U.S. Select Aerospace & Defense Index. Traders have warmed to DFEN as the ETF has seen inflows of nearly $17 million since coming to market.


Like any leveraged ETF, DFEN is a short-term instrument, not a buy-and-hold investment. However, DFEN should have plenty of opportunities to deliver for sophisticated traders if aerospace and defense growth projections prove accurate.


Bullish Forecasts


The global aerospace and defense industry is likely to experience stronger growth in 2017,” according to a Deloitte report. The report indicates that "the industry has experienced multiple years of positive but a subdued rate of growth and in 2017, the aerospace and defense industry is estimated to grow by about 2 percent.” 


DFEN's underlying index allocates about 19 percent of its combined weight to Boeing Co. BA and United Technologies, two of the best-performing members of the Dow Jones Industrial Average this year. 


“Rising global tensions have led to increasing demand for defense and military products in the Middle East, Eastern Europe, North Korea, and the East and South China Seas," Deloitte said. "This is in turn resulting in increased defense spending globally, especially in the United Arab Emirates (UAE), Saudi Arabia, South Korea, Japan, India, China, Russia."


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