Defense ETFs Stabilize After Ceasefire Reports: Why 3 ETFs Have Long-Term Potential

Defense stocks dipped on Wednesday following reports of a verbal ceasefire agreement between Israel and Hamas, taking several related ETFs along.

ETFs like SPDR S&P Aerospace & Defense ETF XAR, iShares U.S. Aerospace & Defense ETF ITA, and Global X Funds Global X Defense Tech ETF SHLD were slightly down as the defense sector lost its appeal to investors.

Nonetheless, the pullback was short-lived, as all three ETFs opened higher and retained momentum on Thursday. Moreover, neither the dip nor the rally was sharp. There can be many possibilities behind this. For starters, the fundamental strength of defense stocks are undeniable.

Secondly, the market might still be taking time to process that a war of such scale can end so abruptly. Thirdly, another major longstanding war that also draws resources from the U.S. is ongoing between Russia and Ukraine. Thus, despite a short-term withdrawal of a few investors from defense ETFs, the longer-term story seems constructive.

Moreover, the ceasefire agreement does not mean that contracts will stop coming for defense companies. Raytheon Technologies RTX, one of the largest holdings of all the aforementioned ETFs, announced a $529 million contract to supply a Patriot air and missile defense system to the Netherlands.

See Also: Raytheon Takes Flight, Boeing Needs More Than Hype: Analyst

The SPDR S&P Aerospace & Defense ETF’s exposure to commercial aerospace alongside defense provides some insulation against geopolitical shifts.

Meanwhile, Global X Funds Global X Defense Tech ETF’s beta of 0.4% means it is less reactive to market volatility.

The War Effect On Defense Stocks

Historically, periods of conflict have been a boon for defense stocks. The Middle East war saw heightened government spending on military contracts, propelling the Global X Defense Tech ETF to a 35% gain over the past year, according to Benzinga Pro.

Companies in this sector see increased demand during conflicts due to the surge in need for defense systems, technology and equipment.

While the ceasefire signals a de-escalation in the Middle East conflict, defense stocks and ETFs are unlikely to lose their long-term optimism. Geopolitical risks remain a persistent concern, and governments worldwide continue to prioritize defense budgets.

Long-term defense investors are likely to restock on defense ETFs at discounted valuations, taking advantage of the uncertainty. Also, integration of advanced technologies like AI and cybersecurity in defense systems are bound to push demand higher.

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