The Xchange Blog

More Room to Run for Defense Bulls?

It’s been 16 months since the inception of the Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN). Last summer’s war of words between President Trump and Kim Jong-Il is part of the reason why the fund is up over 100% since that time.

But even with those tensions in the rearview mirror—at least for now— the sector has still outperformed. The Dow Jones U.S. Select Aerospace & Defense Index (which DFEN tracks) is up nearly 10% year-to-date, compared to the S&P 500’s 8 percent gain. This comes even as some of DFEN’s largest holdings have been range-bound for most of the summer.

DFEN vs. Dow Jones Aerospace & Defense Index
Leveraged ETFs Stocks
Data Range: 1/1/2018 – 8/31/2018. Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For standardized performance and the most recent month-end performance, click here.

Boeing, which makes up 10.82% of the fund, has largely stayed between $330-360 for most of the last two months. Lockheed Martin, 6.98% of DFEN, has spent the last two months between $310-$330. Raytheon, 6.03% of the fund, has traded between $190-$200.

Others top holdings, like Northrop Grumman and General Dynamics, are down 7% and 1% respectively from the May lows. Those two combined represent nearly 11% of DFEN.

The one exception of the fund’s top holdings appears to be United Technologies, which makes up 8.11% of DFEN and is up 14% since bottoming out on May 3.

Looking ahead however, the sector is likely to have an upcoming catalyst in the form of the midterm congressional elections. Chris Higgins, senior equity analyst for Morningstar, recently said in a note that he expects the defense sector to continue to outperform in the long-term despite the midterms causing some potential volatility.

“We believe that while defense stocks may experience near-term softness going into the midterms, they should recover and enjoy a tailwind thanks to outlay growth through late 2018 and into 2019,” he said.

That volatility could be caused if there are gains made by Democrats in the House and Senate which, if they happen, could cause uncertainty about future defense spending.

“Although we see defense budget growth reversing in 2021-23 due to growing mandatory spending requirements…we believe strong moats across the defense companies we cover combined with their proven ability to weather defense cycles means that long-term investors will still be well served holding wide-moat defense stocks that trade at attractive valuations,” Higgins added.

Most A&D companies are squarely located in the United States, so they proportionally benefit from the tax cuts of 2018. On the negative side, the sector is a somewhat pricey, coming in over 47 times the forward price earnings.


Related Leveraged ETFs


Each leveraged ETF seeks investment results that are 300% of the return of its benchmark index for a single day. Each Fund should not be expected to provide returns which are three times the return of benchmark’s cumulative return for periods greater than a day. Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged investment results and intend to actively monitor and manage their investment.
Risks – An investment in the Fund involves risk, including the possible loss of principal. The Fund is non-diversified and includes risks associated with the Fund concentrating its investments in a particular industry, sector, or geographic region which can result in increased volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The Fund does not attempt to, and should not be expected to, provide returns which are three times the performance of its underlying index for periods other than a single day. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Counterparty Risk, Intra-Day Investment Risk, Daily Index Correlation/Tracking Risk, Other Investment Companies (including ETFs) Risk and risks specific to investment in the securities of the Aerospace and Defense Industry and the Industrials Sector. Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.
Dow Jones U.S. Select Aerospace & Defense Index (DJSASDT) – Provided by Dow Jones U.S. Index (the “Index Provider”). The Index attempts to measure the performance of the aerospace and defense industry of the U.S. equity market. The Index Provider selects the stocks comprising the Index from the aerospace and defense sector on the basis of the float-adjusted, market capitalization-weight of each constituent. Aerospace companies include manufacturers, assemblers and distributors of aircraft and aircraft parts. Defense companies include producers of components and equipment for the defense industry, such as military aircraft, radar equipment and weapons. One cannot directly invest in an index.