Diversifying With Aerospace and Defense ETFs

The Obama administration will keep spending on defense and aerospace production is rising, making both sectors good for portfolio diversification.
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NEW YORK (TheStreet) -- The aerospace and defense sector, for good reason, may be the answer to adding diversification to a portfolio.

Recently, the Obama administration stated that spending on defense won't be drastically reduced in the coming years. In fact, President Obama's budget includes more money going to the Pentagon in the next eight years than any other administration since World War II.

One major reason for this surge in defense spending is that the United States needs to upgrade military equipment abroad in order to sustain its global military presence and strength. A second reason supporting this increased budget is the fact that the majority of military goods are made in the U.S. and increased spending in this sector could result in job creation and eventually a spark to a battered economy. Thirdly, the wars that the United States are engaged in around the world aren't likely to end anytime soon, a notion further supported by the Obama administration'd decision to send an additional 30,000 troops to Afghanistan.

In addition to support from the Obama administration, the defense sector is known for its relative stability, which further bolsters its attractiveness to certain investors.

As for the aerospace industry, industry insiders have indicated that production is escalating and are predicting 30,000 new aircraft to hit the market over the next 20 years. This production increase is being driven by outdated fleets, the desire of aircraft carriers to include more fuel-efficient airplanes and an uptick in business, freight and leisure travel, which will all bode well for companies like

Boeing

(BA) - Get Report

and

Airbus

. In fact, Boeing is up nearly 25% year to date and closed at $72.42 on Friday.

Some diversified ways to play aerospace and defense include the following:

  • PowerShares Aerospace and Defense (PPA) - Get Report, which boast defense contractors like Lockheed Martin (LKM) - Get Report and L-3 Communications (LLL) - Get Report. PPA also boasts aerospace giants Honeywell (HON) - Get Report and Rockwell Collins (COL) . PPA closed at $18.84 on Friday.
  • iShares Dow Jones US Aerospace & Defense (ITA) - Get Report, which includes holdings like General Dynamics (GD) - Get Report and United Technologies. ITA closed at $58.10 on Friday.

Although an opportunity seems to exist in the aerospace and defense industry, it is equally important to keep in mind the inherent risks involved with investing in equities. To help protect against these risks, the use of an exit strategy which identifies a price point at which an upward trend in these equities could come to an end is of utmost importance.

According to the latest data at

SmartStops.net

, an upward trend in Boeing could come to an end at $69.56. For the other mentioned equities, an upward trend could come to an end at the following price points: PPA at $18.51 and ITA at $56.73.

Written by Kevin Grewal in Laguna Niguel, Calif.

At the time of publication, Grewal had no position in the securities mentioned

.

Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.