Are the War Drums Beating for Defense Stocks Again?

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Geopolitical tensions spiked across the globe in 2022, and as we begin the new calendar year, traders need to be wary of an escalation of these ongoing conflicts. Between the situations in Ukraine and Taiwan, markets may be susceptible to massive fiscal and monetary intervention by governments and central banks, respectively, if conditions spiral out of control.

Economic Fallout or Fiscal Boom?

The consequences of military conflicts are tragic in innumerable ways, but as traders, it’s a facet of reality that must be reconciled. During periods of turmoil, governments historically boost defense spending, and in dramatic instances, even ration the supply of goods. The primary beneficiary of higher military budgets are generally defense companies in the private sector.

IIn such a scenario, we believe that Direxion’s Daily Aerospace & Defense Bull 3X Shares (Ticker: DFEN), which seeks daily investment results, before fees and expenses, of 300% of the performance of the Dow Jones U.S. Select Aerospace & Defense Index,* may see a strong bid.

The top holdings in DFEN include Raytheon Technologies (Ticker: RTX) [21.42%], Lockheed Martin (Ticker: LMT) [16.15%], and Boeing (Ticker: BA) [7.43%].* These are some of the biggest defense contractors in the world, and traders may want to stay alert for any announcements surrounding new contracts from governments.

*As of 12/31/2022. Holdings are subject to change and risk.  For a full list of holding, please click here.

Both Raytheon’s and Lockheed Martin’s Q4 2022 earnings reports are on January 24, with earnings-per-share (EPS) estimates of $1.24 and $7.41, respectively. Boeing’s Q4 earnings release is the following day on January 25, and analysts are expecting an EPS of $0.39.

Below is a daily chart of DFEN as of January 5, 2023:

Source: TradingView.com

Candlestick charts display the high and low (the stick) and the open and close price (the body) of a security for a specific period. If the body is filled, it means the close was lower than the open. If the body is empty, it means the close was higher than the open.

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 the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Multiple Order Spillovers

Nothing in markets occurs in a vacuum. If geopolitical tensions continue to escalate in 2023, stock, bond, and commodity markets are all likely to be affected. Increased government spending could stimulate the economy, which could potentially be bullish, but war is notorious for the destruction of capital, which could potentially be bearish.

Traders have the opportunity to play both sides of the equity market through Direxion’s Daily S&P 500^® Bull 3X Shares (Ticker: SPXL) and Daily S&P 500^® Bear 3X Shares(Ticker: SPXS) , which seek daily investment results, before fees and expenses, of 300%, or 300% of the inverse (or opposite), respectively, of the performance of the S&P 500^® Index.*

With respect to fixed income, Treasury markets could suffer from higher government spending and increased risk premium,* in which case, we believe that Direxion’s Daily 20+ Year Treasury Bear 3X Shares (Ticker: TMV) could see a bid. But the flight-to-safety* trade from global capital can’t be discounted either, which may be beneficial to Direxion’s Daily 20+ Year Treasury Bull 3X Shares (Ticker: TMF). TMV and TMF seek daily investment results, before fees and expenses, of 300% of the inverse (or opposite) or 300%, respectively, of the performance of the ICE U.S. Treasury 20+ Year Bond Index.*

*Definitions

- The Dow Jones U.S. Select Aerospace & Defense Index (DJSASDT) is 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.

- Earnings-per-share (EPS) is a company's net profit divided by the number of common shares it has outstanding.

- Standard & Poor’s® selects the stocks comprising the S&P 500® Index (SPXT) on the basis of market capitalization, financial viability of the company and the public float, liquidity and price of a company’s shares outstanding. The Index is a float-adjusted, market capitalization-weighted index.

- The ICE U.S. Treasury 20+ Year Bond Index (IDCOT204) is a market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than 20 years. Eligible securities must be fixed rate, denominated in U.S. dollars, and have $300 million or more of outstanding face value, excluding amounts held by the Federal Reserve.  Securities excluded from the Index are inflation-linked securities, Treasury bills, cash management bills, any government agency debt issued with or without a government guarantee and zero-coupon issues that have been stripped from coupon-paying bonds.

- Flight to safety occurs when investors shift their asset allocation away from riskier investments and into safer ones, for instance out of stocks and into bonds, namely US Treasurys.

- A risk premium is a measure of excess return that is required by an individual to compensate being subjected to an increased level of risk. It is used widely in finance and economics, the general definition being the expected risky return less the risk-free return, as demonstrated by the formula below.

One cannot directly invest in an index.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at www.direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

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, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.

Direxion Shares 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. Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the securities of the Aerospace and Defense Industry and the Industrials Sector.  Companies in the aerospace and defense industries, a component of the industrials sector, can be significantly affected by changes in government regulations and spending policies, economic conditions and industry consolidation.  Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor: Foreside Fund Services, LLC.