CAPE TOWN – The amount of money spent around the world every year on defense products and services is somewhere around $1.7 trillion. Most of this comes from the US, which currently spends more on defense than the next eight countries combined.
The US Federal government’s total military budget for 2014 was $600 billion. That is up from $287 billion in 2001.
While the current administration has been actively trying to reduce military spending as a percentage of GDP, it is likely to remain the second largest item on the budget after social security.
Most of this spending is directed towards companies listed in the aerospace and defense sector of the US stock market. It goes to the likes of Lockheed Martin, which produces the iconic F-16 fighter jet, or Raytheon, which makes Tomahawk missiles.
However this sector is not only about the military. In fact, the largest company on the Dow Jones US Aerospace and Defense Index is Boeing. While it does produce warplanes and guided missiles, 60% of Boeing’s business comes from building commercial aircraft.
A recent forecast from the company suggests that $5 trillion will be spent on commercial planes carrying more than 100 passengers over the next 20 years. More than $600 billion is likely to be spent over the same period on smaller commercial aircraft, and another $600 billion on business jets.
There is clearly a huge amount of money being directed towards this sector, and it is a theme that investors can access through the iShares US Aerospace and Defense ETF, which is tradeable through the Standard Bank Webtrader platform.
The ETF tracks the Dow Jones US Aerospace and Defense Index, which is made up of 37 stocks listed on the New York Stock Exchange. Over the last year the ETF has gained 15.06% at a dividend yield of 0.8%.
Lower military spending by the US may impact on the performance of some of these stocks, however many are also earning revenues through foreign contracts. At the same time, the demand for commercial aircraft as well as the technologies and services that go with them is expected to remain strong as fleets around the world are ageing and will be replaced as the global economy picks up.
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