Returns on Risk

Funds related to defense and homeland security pick up steam.

Companies that sell defense and homeland security-related products and services get a boost when war and terrorists strike. Now, investors can, too.

Ever since the Sept. 11 attacks, the defense sector has outperformed the Standard & Poor's 500 Index, which tracks 500 of the top U.S. companies. While that's bad news for world peace, it's good news for investors in that industry. Financial institutions are offering investors more funds to help them capture those gains.

In October 2005, PowerShares Capital Management LLC, an asset management firm in Wheaton, Ill., launched an aerospace and defense exchange-traded fund. ETFs function like stocks, which means they can be bought and sold throughout the day. But unlike stocks, they represent a range of individual securities. PowerShares' fund is based on the Spade Defense Index (named after the first letters of space and defense) created by Scott Sacknoff, a Washington-based industry consultant. It invests in more than 50 companies in the defense, aerospace and homeland security fields, including Lockheed Martin Corp., EchoStar Communications Corp. and Computer Sciences Corp.

In May 2006, the San Francisco asset management firm Barclays Global Investors launched its own defense and aerospace exchange-traded fund. It's based on the Dow Jones U.S. Select Aerospace & Defense Index, which includes defense and aerospace-related industrial companies. Unlike the Spade Defense Index, it doesn't include companies that sell information technology or telecommunications equipment. Investors poured $47 million into the fund during the first month and a half of its existence, which BGI spokesman Tom Taggart says, is a strong start.

Sacknoff, whose fees depend partially on investments in the PowerShares fund, is blunt in his predictions for the sector's success. Defense and homeland security spending will continue to rise, he says. He points to Pentagon estimates that the Defense budget will reach almost $500 billion by 2010 from its current $420 billion. He adds that more outsourcing of services by the Pentagon will continue to boost the sector even if Iraq war spending declines.

In a presentation to PowerShares in 2005, Sacknoff said investing in the fund serves as a buffer during negative world events such as war and terrorism, because the sector tends to go up in reaction to such incidents, while other stocks are likely to go down.

Of course, positive returns are not guaranteed. In May, the Spade Defense Index dropped by almost 4 percent. Sacknoff attributes the fall to overall market declines. "You'd have to say it's doing fine even though it has gone down," he says.

Investors appear to share that view. Total assets invested in the Spade fund rose to $83.4 million at the end of May from $64.4 million at the end of February. "There's broad appeal because [exchange-traded funds] allow you to get sector exposure without having to pick an individual stock," says Peter Arment, analyst at the aerospace equity research firm JSA Research in Newport, R.I.

Exchange-traded funds typically charge lower fees because they are based on an index and not actively managed through constant stock analysis. PowerShares maintains an expense cap of 0.60 percent per year, or $6 per $1,000 invested, and Barclays levies an expense ratio of 0.48 percent, or $4.80 per $1,000 invested. Fidelity Investments, an international financial services firm, which has offered a defense and aerospace mutual fund since 1984, charges an expense ratio of 0.97 percent, or $9.70 per $1,000 invested.

Excluding expenses and dividends, someone who invested $1,000 in the Spade Defense Index on Sept. 17, 2001, the day the markets opened after Sept. 11, would have earned an additional $1,013 by June 21, 2006. An equal investment in the S&P 500 Index would have generated $146. Betting on warfighters' needs rarely has been so lucrative.

Stay up-to-date with federal news alerts and analysis — Sign up for GovExec's email newsletters.
FROM OUR SPONSORS
JOIN THE DISCUSSION
Close [ x ] More from GovExec
 
 

Thank you for subscribing to newsletters from GovExec.com.
We think these reports might interest you:

  • Forecasting Cloud's Future

    Conversations with Federal, State, and Local Technology Leaders on Cloud-Driven Digital Transformation

    Download
  • The Big Data Campaign Trail

    With everyone so focused on security following recent breaches at federal, state and local government and education institutions, there has been little emphasis on the need for better operations. This report breaks down some of the biggest operational challenges in IT management and provides insight into how agencies and leaders can successfully solve some of the biggest lingering government IT issues.

    Download
  • Communicating Innovation in Federal Government

    Federal Government spending on ‘obsolete technology’ continues to increase. Supporting the twin pillars of improved digital service delivery for citizens on the one hand, and the increasingly optimized and flexible working practices for federal employees on the other, are neither easy nor inexpensive tasks. This whitepaper explores how federal agencies can leverage the value of existing agency technology assets while offering IT leaders the ability to implement the kind of employee productivity, citizen service improvements and security demanded by federal oversight.

    Download
  • IT Transformation Trends: Flash Storage as a Strategic IT Asset

    MIT Technology Review: Flash Storage As a Strategic IT Asset For the first time in decades, IT leaders now consider all-flash storage as a strategic IT asset. IT has become a new operating model that enables self-service with high performance, density and resiliency. It also offers the self-service agility of the public cloud combined with the security, performance, and cost-effectiveness of a private cloud. Download this MIT Technology Review paper to learn more about how all-flash storage is transforming the data center.

    Download
  • Ongoing Efforts in Veterans Health Care Modernization

    This report discusses the current state of veterans health care

    Download

When you download a report, your information may be shared with the underwriters of that document.