US Approves $93M Weapon Sale to India: A Boost for Defense ETFs

In a significant boost to U.S.-India strategic ties, the United States has officially approved $93 million in weapon sales to India, covering the supply of up to 100 Javelin anti-tank missiles and 216 Excalibur precision-guided artillery rounds, as reported by the BBC. The transaction, aimed at enhancing India’s ability to counter current and emerging threats, should boost the revenue generation prospects for the American defense companies that manufacture these advanced weapon systems. 

Consequently, this positive outlook extends to defense-focused Exchange Traded Funds (ETFs) that offer diversified exposure to these very contractors. As orders like these materialize, the underlying companies' financial performance improves, which can then translate into gains for the ETFs holding the stocks.
But before diving into the ETFs that stand to gain from this sale, let’s take a closer look at which stocks will benefit from the deal and why we are advocating for ETFs instead of individual equities.

The Weapons & Their Makers

The weapons included in this sale are cutting-edge and produced by some of the biggest names in the U.S. defense industry:

•    Javelin Anti-Tank Missiles: Manufactured by a joint venture between Lockheed Martin LMT and RTX Corp.’s RTX Raytheon unit, the Javelin is a highly effective "fire-and-forget" anti-tank missile system capable of defeating heavy armor from above, where it is most vulnerable. It is designed for a one-soldier operation and is renowned for its effectiveness against modern battle tanks. 

•    Excalibur Munitions: Primarily produced by Raytheon and BAE Systems BAESY, the Excalibur is a revolutionary precision-guided artillery shell. This GPS-guided projectile enables artillery units to achieve unprecedented accuracy, striking targets with minimal collateral damage and reducing the number of rounds required for a mission. It delivers less-than-10-meter accuracy even at a range of up to 50km, offering programmable detonation modes for versatility.

Why ETFs Are a Smarter Move

While investing directly in individual defense contractors like Lockheed Martin, Raytheon, or BAE Systems, which are expected to benefit from the latest U.S.-India weapons sale directly, might seem appealing, it comes with inherent risks. Individual defense stocks can carry unique financial and operational challenges. 

For instance, Lockheed Martin has a high debt-to-equity ratio of 3.59, which is significantly above the industry average of 1.06 and thus remains susceptible to huge losses in times of crisis due to this enhanced leverage. Similarly, BAE Systems has demonstrated recent stock volatility, moving against broader market trends due to company-specific pressures despite a longer-term recovery.

On the other hand, RTX is trading at a premium to its industry average, which might discourage an investor from choosing it. An ETF helps mitigate such individual stock risks.

A single defense ETF provides instant exposure to a basket of major aerospace and defense companies, bypassing the need for investors to allocate capital and manage multiple stock positions individually. This not only saves time and effort but also ensures that your investment isn't reliant on the performance of a single company, making it a more resilient choice for most investors.

Defense ETFs to Gain

Considering the aforementioned discussion, for investors looking to capitalize on this international defense deal without the hassle of stock-picking and also avoiding the risk of single-stock investment, here we present three ETFs that are well-positioned to gain from the latest deal as well as continued strength in the defense sector:

Global X Defense Tech ETF SHLD

This fund, with net assets worth $4.84 billion, offers exposure to 42 companies positioned to benefit from the increased adoption and utilization of defense technology. RTX holds the first spot in this fund, with 8.74% weightage, LMT holds the third spot with 7.35% weightage and BAESY holds the fifth spot with 6.64% weightage. 

SHLD has surged 66.3% year to date. The fund charges 50 basis points (bps) as fees. 

Invesco Aerospace & Defense ETF PPA

This fund, with net asset value of $148.98 per share, offers exposure to 61 companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations. RTX holds the first spot in this fund, with 8.72% weightage, while LMT holds the third spot with 7.08% weightage. 

PPA has soared 27.9% year to date. The fund charges 58 bps as fees.

iShares U.S. Aerospace & Defense ETF ITA

This fund, with net asset worth $11.60 billion, offers exposure to 39 U.S. companies that manufacture commercial and military aircraft and other defense equipment. RTX holds the second spot in this fund, with 16.12% weightage, while LMT holds the eighth spot with 4.45% weightage. 

ITA has surged 37.6% year to date. The fund charges 38 bps as fees.  

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research