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As Syria Escalates, Look to Defense ETFs

Year to date, all three funds are up more than the S&P 500, which has returned 18%, and Industrial Select Sector SPDR (XLI), which has returned 20%.

PPA is up 24% in 2013, ITA is up 26% and XAR has pulled ahead with a 33% rally. The reason for XAR's outperformance appears to be its holding in ammunition maker Alliant Tech Systems (ATK), which currently has a 5% weight, much larger than in the other funds. ATK is up 63% for the year. Any sort of meaningful decline for ATK would likely cause XAR to lag the other funds.

From the top down, defense stocks are part of the industrial sector.

Industrial stocks tend to fair worse than the broad market during bear markets and economic downturns. PPA and ITA went down a little more than the SPDR S&P 500 (SPY) during the last bear market.

If rising interest rates hasten an end to the bull market and Syria ends up being not as bad as it now seems, then defense stocks will likely lag the market.

At the time of publication, Nusbaum had no positions in securities mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
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