Hello! This is MarketWatch reporter Isabel Wang bringing you this week\u2019s ETF Wrap. In this week\u2019s edition, we look at defense ETFs, which have rallied on the back of the Middle East conflict since the Palestinian militant group launched surprise cross-border raids from Gaza 13 days ago, pushing the region to the precipice of a dangerous abyss.<\/p>\n
Please send tips, or feedback, to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on Twitter at @Isabelxwang<\/a> and find Christine at @CIdzelis<\/a>.<\/p>\n Sign up here for our weekly ETF Wrap.<\/p>\n The bloody conflict between Israel and Palestinians is pushing the exchange-traded funds that track U.S. aerospace and defense stocks higher in the past two weeks, with investors seeking defense exposure as a hedge against geopolitical tensions.\u00a0<\/p>\n Shares of the iShares U.S. Aerospace & Defense ETF ITA, with over $5 billion in assets under management, attracted over $93 million of net inflows in the week to Wednesday, while the $2 billion PPA saw net inflows of $61 million last week, its best showing since July 2022, and the $2 billion XAR recorded a total inflow of $32 million over the same period, according to FactSet data.\u00a0<\/p>\n Seven funds in the U.S. aerospace and defense ETF sector, which in total manage over $8.8 billion, most have Lockheed Martin Corp. See:<\/strong> Surging aerospace and defense stocks lift these ETFs as investors monitor Israel-Hamas war<\/p>\n However, equity and ETF analysts warn investors should be careful about flooding into aerospace and defense sector as the dots between military combat and the profits of defense contractors do not connect as directly as they seem to be, said Nicolas Owens, an industrials equity analyst at Morningstar Research Services.\u00a0<\/p>\n Defense stocks are often seen as safe investments included in portfolios to generate income. An escalating geopolitical conflict, an increase in the government defense spending, and new technological advancements in warfare usually prompt investors to revisit the sector with the hope that the war could lead to more purchases of weapons manufactured by a defense firm and trigger a big jump in the corporate profit.<\/p>\n The narrative, despite logically sound, does not hold much water as it ignores how long in advance militaries procure weapons, and how they\u2019re subject to strategic and political constraints, Owens said in a blog post.<\/p>\n Meanwhile, Owen and his team didn\u2019t see \u201cincremental upside\u201d to global defense spending, especially after former President Donald Trump in 2017 unveiled a new U.S. defense strategy to protect national interests against great-power rivalry, and after Russia\u2019s invasion of Ukraine in early 2022.\u00a0<\/p>\n Aniket Ullal, head of ETF data and analytics at CFRA, said the team still called on neutral ratings on most of the stocks held in the defense ETFs as they don\u2019t see the Middle East conflict really move the needle in terms of global defense spending.\u00a0<\/p>\n Ullal, in a phone interview, told MarketWatch that there\u2019s a fair amount of headwinds weighing on the defense ETF sector. For example, the supply-chain constraints could lead to a backlog that takes time to translate to corporate sales and profits, while the multi-year fixed-price weapon contract could result in lower margins given the high inflation, he said.\u00a0<\/p>\n \u201cEven though there may be some positive sentiment around these ETFs, [but] from a fundamentals perspective, [it] probably isn\u2019t very significant, which may explain some of the recent pullback [in defense ETFs],\u201d Ullal said.\u00a0<\/p>\n ITA has fallen 0.4% so far this week, while PPA has dropped over 1.3% and XAR has edged up 0.8% for the week, according to FactSet data.\u00a0<\/p>\n See: <\/strong>Defense spending boosts economy as U.S. mulls more aid for Ukraine and Israel<\/p>\n Most defense companies get the revenue from one customer \u2014 the U.S. Department of Defense. The United States spent $736 billion on national defense during fiscal year 2023, which amounted to 13% of federal spending and represented the country\u2019s third-largest spending category after social security and healthcare, according to the USASpending.gov.<\/p>\n The debt-ceiling agreement negotiated between House Republican leaders and President Joe Biden earlier this year would cap the defense budget topline at the requested $886 billion for fiscal 2024, a 3.3% increase over this year.\u00a0<\/p>\n \u201cThe expectations are that globally we\u2019re going to see a buildup of defense and especially in the United States,\u201d said Quincy Krosby, chief global strategist at LPL Financial. \u201cThe defense spending in the U.S. has to go up \u2014 we are sitting in a geopolitical environment that has shifted.\u201d\u00a0<\/p>\n See:<\/strong> Government shutdown averted \u2014 for now. Here\u2019s what\u2019s next for Congress.<\/p>\n Meanwhile, a still-lingering concern that lawmakers need to pass another spending bill before November 17 to avoid a government shutdown also weighs on the markets.\u00a0<\/p>\n \u201cThe concern for many of the contractors and subcontractors for the defense spending is that they\u2019re not going to be paid, and their share prices go down, [but] any fear that the government shuts down again in the middle of November typically provides an attractive entry [for defense stocks] if we will have a much larger defense spending,\u201d Krosby told MarketWatch via phone on Thursday.\u00a0<\/p>\n As usual, here\u2019s your look at the top- and bottom-performing ETFs over the past week through Wednesday, according to FactSet data.<\/p>\n
\n ITA,<\/span>
\n which tracks U.S.-listed manufacturers, assemblers and distributors of aircraft and equipment for the defense industry, advanced 5.2% since October 6, the last trading day before Israel officially declared war after a surprise attack by the militant group Hamas over the weekend. The Invesco Aerospace & Defense ETF
\n PPA
\n gained 6.3% and the SPDR S&P Aerospace & Defense ETF
\n XAR
\n rose 4.2% over the same period, according to FactSet data.\u00a0<\/p>\n
\n LMT,
\n
\n Northrop Grumman
\n NOC,
\n
\n and General Dynamics
\n GD,
\n
\n as their top holdings. Shares of the defense giant Lockheed Martin rallied by about 11.9%, and Northrop Grumman jumped by 15.7% since the initial attacks on Israel earlier this month, according to FactSet data.\u00a0<\/p>\nThe good\u2026<\/h2>\n
\n
\n \n Top Performers<\/strong><\/p>\n<\/td>\n \n %Performance<\/strong><\/p>\n<\/td>\n<\/tr>\n \n \n ETFMG Prime Junior Silver Miners Fund
\n SILJ\n <\/td>\n\n 7.4<\/p>\n<\/td>\n<\/tr>\n \n \n VanEck Junior Gold Miners ETF
\n GDXJ\n <\/td>\n\n 7.3<\/p>\n<\/td>\n<\/tr>\n \n \n Global X Silver Miners ETF
\n SIL\n <\/td>\n\n 6.9<\/p>\n<\/td>\n<\/tr>\n \n \n VanEck Gold Miners ETF
\n GDX\n <\/td>\n\n 6.2<\/p>\n<\/td>\n<\/tr>\n \n \n ProShares Bitcoin Strategy ETF
\n BITO\n <\/td>\n\n 5.9<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet data through Wednesday, Oct. 18. Start date Oct. 12. Excludes ETNs and leveraged products. Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater<\/p>\n<\/td>\n<\/tr>\n<\/table>\n \u2026and the bad<\/h2>\n
\n
\n \n Bottom Performers<\/strong> <\/p>\n<\/td>\n \n %Performance<\/strong> <\/p>\n<\/td>\n<\/tr>\n \n \n United States Natural Gas Fund LP
\n UNG\n <\/td>\n\n -7.9<\/p>\n<\/td>\n<\/tr>\n \n \n VanEck Vietnam ETF
\n VNM\n <\/td>\n\n -6.6<\/p>\n<\/td>\n<\/tr>\n \n \n YieldMax TSLA Option Income Strategy ETF
\n TSLY\n <\/td>\n\n -5.4<\/p>\n<\/td>\n<\/tr>\n \n \n Global X Lithium & Battery Tech ETF
\n LIT\n <\/td>\n\n -4.9<\/p>\n<\/td>\n<\/tr>\n \n \n SPDR S&P Semiconductor ETF
\n XSD\n <\/td>\n\n -4.7<\/p>\n<\/td>\n<\/tr>\n \n \n Source: FactSet data<\/p>\n<\/td>\n<\/tr>\n<\/table>\n New ETFs<\/h2>\n
\n
\n TSLT,<\/span>
\n the T-REX 2X Inverse Tesla Daily Target ETF
\n TSLZ,<\/span>
\n the T-REX 2X Long NVIDIA Daily Target ETF
\n NVDX,<\/span>
\n and the T-REX 2X Inverse NVIDIA Daily Target ETF
\n NVDQ.<\/span><\/p>\n<\/li>\n<\/ul>\nWeekly ETF reads<\/h2>\n<\/p><\/div>\n