Protect Your Portfolio With Defense Funds

The Indianapolis Colts won last season's Superbowl largely because the team unexpectedly fielded a defense that was almost as potent as its deadly passing game.

Until this Sunday when they were edged out by the New England Patriots, that defense helped the Colts maintain a perfect record through the first seven games of this year's campaign.

With the stock market alternatively jumping on interest-rate cuts and running into air pockets on earnings disappointments, a few added defensive stocks for your portfolio wouldn't be a bad idea.

Exposure to defense -- the defense industry, that is -- might be a good way to add some defensiveness to holdings.

After all, U.S. defense spending is hardly likely to fall, given the current tension with Iran and North Korea. And while some presidential candidates would like to wind down our military involvement in Iraq, none has been calling for drastic cuts in overall defense spending.

And since federal spending on defense isn't really a function of corporate profits, you could argue that the defense industry represents, well, a defensive investment opportunity.

The performance of defense stocks in recent years has more closely resembled the explosive Colts offense than that of a grind-out-the-yards-but-don't-surrender-any-turf squad.

Adding to the appeal of companies in the defense industry is that, to the consternation of pacifists, they tend to book relatively heavy overseas sales, thus capitalizing on elevated global military tensions as well as the rising value of foreign currencies relative to the U.S. dollar.

The SPADE Defense Index -- an acronym for "SPAce" and "DEfence" -- has climbed steadily from a value of 1000 at the end of 2002 to recent highs north of 2750. The benchmark has outperformed the S&P 500 in each of the past seven calendar years and enjoys a comfortable lead so far in 2007.

TheStreet.com Ratings tracks three funds that are pure plays on the sector. (FSDAX Quote)Fidelity Select Defense & Aerospace (FSDAX) is the lone open-end mutual fund defense sector pure play. The fund holds 14 of the 25 largest components of the SPADE index, making up 70.6% of its holdings. The fund's largest holdings are Lockheed Martin (LMT Quote) and General Dynamics (GD Quote).

The PowerShares Aerospace & Defense Portfolio (PPA Quote), an exchange-traded fund, tracks the SPADE Defense Index. The 25 largest SPADE components account for 83.6% of its value. Its largest holdings are Lockheed Martin and Honeywell International (HON Quote).

The iShares Dow Jones U.S. Aerospace & Defense Index ETF (ITA Quote) tracks the Dow Jones index embedded in its name. It holds 15 of the 25 largest SPADE components, which comprise 72.5% of its total net assets. Boeing(BA Quote) and United Technologies (UTX Quote) are the fund's largest holdings.

All three sport the TheStreet.com Rating's highest possible grade of A+, placing them in the buy category. Each member of the trio has a return of more than double the S&P 500's 14.56% over the past 12 months. In addition, each has produced double-digit gains for the three-month period ended Oct. 31.

Major Defense Stocks are Widely Held Funds investing in the 25 largest components of the SPADE index.
COMPANY & TICKER	NO. OF OPEN- END FUNDS	NO. OF ETFs	NO. OF CLOSED- END FUNDS	TOTAL FUNDS	TOTAL VAL. OF FUND POSITIONS ($MIL)
Boeing Company (BA)	664	50	26	740	17,284.8
United Technologies Corp (UTX)	773	65	28	866	16,976.2
Honeywell International Inc (HON)	599	52	27	678	10,955.7
General Dynamics Corp. (GD)	499	44	13	556	9,773.3
Lockheed Martin Corp. (LMT)	529	48	18	595	9,648.8
Northrop Grumman Corp. (NOC)	465	49	14	528	8,056.8
Raytheon Company (RTN)	555	54	16	625	7,671.7
Precision Castparts Corp (PCP)	450	40	4	494	6,795.3
Rockwell Collins Incorp. (COL)	300	42	9	351	3,279.8
L-3 Communications Hldgs Inc (LLL)	328	40	16	384	3,209.7
Computer Sciences Corp. (CSC)	308	39	6	353	3,076.5
Garmin Limited (GRMN)	128	21	4	153	2,922.5
Harris Corp. Delaware (HRS)	302	39	6	347	2,814.6
ITT Corp. (ITT)	292	42	7	341	2,507.5
Goodrich BF Company (GR)	299	41	8	348	2,485.8
Alliant Techsystems Inc (ATK)	218	37	10	265	1,884.5
FLIR Systems Inc. (FLIR)	191	32	2	225	1,732.7
Ball Corp. (BLL)	261	43	7	311	1,674.9
Oshkosh Truck Corp. (OSK)	198	33	1	232	1,670.6
Trimble Navigation Limited (TRMB)	218	32	0	250	1,640.4
DRS Technologies Inc. (DRS)	340	33	42	415	1,513.0
URS Corp. (URS)	180	33	0	213	896.7
Moog Inc. (MOGA)	159	23	1	183	792.5
Ceradyne Inc. (CRDN)	209	28	1	238	665.0
SAIC Inc. (SAI)	73	20	1	94	258.4
TOTAL					120,187.7
Source: TheStreet.com Ratings

The above table lists open-end mutual funds and ETFs with at least 15% of assets invested in major defense and space industry stocks--defined as the largest 25 components of the SPADE Defense Index. The funds are listed in descending order by percentage holdings of the major SPADE stocks.

The 25 major defense and space stocks are listed in a separate table at the bottom of this page.

No closed-end fund reports portfolio holdings of 15% or more in the 25 major defense and space stocks.

All 13 open-end funds on the list produced returns comfortably in the double digits for the past 12 months, handily outperforming the total return of the S&P 500. All but one of them beat the S&P over the past three months.

Of the eight defense-heavy ETFs with at least a year of performance history, all but one achieved 12-month returns of at least 20%, easily outdistancing the S&P gauge. But of the nine ETFs on the list, only the two pure-play funds exceeded the S&P's performance by producing double-digit returns for the latest three months.

FUNDS HOLDING MAJOR DEFENSE & SPACE STOCKS
NAME, TICKER & TheStreet.com RATINGS GRADE *	NO. OF MAJOR	VAL. OF MAJOR	PCT. OF PORTFOLIO IN MAJOR	3-MO. TOTAL RET'N (%)	12-MO. TOTAL RET'N (%)
OPEN-END MUTUAL FUNDS
Fidelity Select Defense & Aerospace (FSDAX) A+	14	945.8	70.6	10.68	33.36
Fidelity Select Air Transport (FSAIX) A-	7	31.6	33.3	5.59	19.54
MUTUALS.com Vice Fund (VICEX) A+	10	30.3	26.2	16.39	34.02
Fidelity Select Ind Equipment (FSCGX) B+	10	19.9	21.3	8.76	30.31
Fidelity Adv Industrials A (FCLAX) B+	7	68.4	20.1	7.51	25.63
ICON Industrials (ICTRX) D+	13	20.0	19.8	7.13	30.16
Vanguard Industrials Index Adm (VINAX) A	18	43.6	19.5	5.01	23.06
Fidelity Select Industrials Port (FCYIX) B+	6	16.7	18.4	7.50	25.93
SunAmerica Foc Lrg-Cp Gr A (SSFAX) D	4	196.7	16.9	15.88	22.88
Chase Growth Fund (CHASX) B-	6	97.7	16.6	14.50	21.89
Franklin Growth A (FKGRX) B-	8	469.8	15.9	8.22	18.02
Brandywine Advisors (BWAFX) C+	5	39.6	15.6	12.05	31.36
Ancora Equity Fund Class C (ANQCX) B+	5	2.6	15.0	7.86	19.12
EXCHANGE TRADED FUNDS
PowerShares Aerospace & Defense Portfolio (PPA) A+	25	204.4	83.6	10.85	36.66
iShares DJ US Aerospace & Def Idx (ITA) A+	15	152.2	72.5	11.45	40.49
Industrial Select Sector SPDR Fund (XLI) A-	11	295.3	27.6	3.41	20.41
PowerShares Dynamic Industrials Sector Portfolio (PRN) U	12	13.6	25.3	4.96	26.45
Rydex S&P Equal Weight Industrial ETF (RGI) U	11	1.8	21.9	3.07	N/A
Vanguard Industrials ETF (VIS) B+	18	43.6	19.5	4.23	22.96
iShares Dow Jones U.S. Industrial Sector Index Fund (IYJ) B+	21	57.8	17.7	4.50	22.11
PowerShares FTSE RAFI Industrials Sector Portfolio (PRFN) U	16	7.4	17.2	2.99	20.22
Dow 30 Premium & Dividend Income Fund (DPD) C-	3	34.4	15.0	0.19	4.38
S&P 500 TOTAL RETURN INDEX	14		3.0	6.97	14.56
* "U" is unrated. ** Holdings of largest 25 stocks in the SPADE Defense Index (acronym for "SPAce" & "DEfense") of companies in the defense, homeland security & space marketplace. Sources: TheStreet.com Ratings & Bloomberg (data as of 10/31/2007).