How to invest in defense companies? [Guide]

War has accompanied mankind since the dawn of time. Carl von Clausewitz mentioned that "War is only a continuation of politics by other means." With the development of the means of mass destruction, each successive war became more bloody. After the Second World War and the emergence of nuclear weapons, there was a period of fear of a nuclear war between NATO and the Warsaw Pact troops. This provided peace, which was mainly due to the fear of self-destruction.

After the collapse of the Union of Soviet Socialist Republics, it seemed that the threat of nuclear war had passed forever. The war in the Balkans and Georgia was downplayed by the people. It was said about Pax Europeanathat is an unprecedented period in history without great wars in Europe. It was only Russia's aggression against Ukraine that made many European politicians realize that peace in the Old Continent was not given once and for all. 

In order to persuade the Russian Federation to abandon its aggressive policies, many countries have imposed economic and political sanctions on Russia and on leading politicians in the Russian Federation. Political and military tensions made it necessary to adjust military spending and economic policies of many countries to the "new reality". Germany has revised its energy policy and intends to build two LNG ports to offset possibly smaller supplies from the Russian Federation. In turn, the chancellor of Germany Olaf Scholz announced that he intends to convince the Bundestag to create a special fund for the Bundeswehr (German armed forces) worth EUR 100 billion. At the same time, German defense spending is expected to amount to 2% of Germany's GDP. It is truly a Copernican coup, because pacifist sentiments have prevailed in German politics so far. This political earthquake in Europe may increase the demand for weapons in NATO countries. It is likely that the demand for modern light infantry weapons, drones and air defense systems will increase. Of course, the majority of funds will also be spent on the navy and aviation.

Cyber ​​warfare cannot be forgotten either, which is why the demand for defense systems against cyber attacks will increase. Companies from the defense industry in Europe and the United States may be the beneficiaries. Many of the companies in this sector are listed on the largest stock exchanges in the world. Investors who started investing in companies from the defense sector also reacted to the last event. Interestingly, this trend also applied to the Polish stock market, where companies such as Protector (manufacturer of shoes for the army, among others) or Lubawa (manufacturer of, among others, military tents, helmets and bulletproof vests). Of course, as an editorial office, we completely disapprove of warfare, but answering readers' questions, we have prepared an article on how to invest in companies from the defense sector. We invite you to read.

How can you invest in defense companies?

An investor who wants to gain exposure to defense companies may, inter alia, buy an ETF based on this industry or focus on selected companies.

Investment through ETF

Buying an ETFthat gives you exposure to defense companies is the easiest way to invest. The investor will not have to analyze companies in terms of fundamental or technical analysis. It will simply buy a basket of defense companies. The downside to doing this is that it buys both "The best" industry companies as well as these "the worst".

One option is to acquire iShares US Aerospace & Defense ETF, which provides exposure to the largest companies in the defense and aviation sectors. He is the benchmark for the ETF Dow Jones US Select Aerospace & Defense Index. According to data at the end of February 25, 2022, the assets under management (AUM) of this ETF amounted to over USD 2 billion. Currently, iShares US Aerospace & Defense ETF consists of 600 companies. Over the last 33 years, the average annual rate of return on this ETF was 10%, which was 14,33 basis points lower than the benchmark (47%). Currently, the annual management fee is now 14,8%.

Here is a list of the top 10 positions in this ETF:

• Raytheon Technologies - 22,7%
• Boeing - 17,2%
• Lockheed Martin - 5,9%
• General Dynamics - 4,9%
• Northrop Grumman - 4,8%
• TransDigm Group - 4,6%
• L3harris Technologies - 4,6%
• Howmet Aerospace - 4,6%
• Textron - 4,1%
• Axon Enterprise - 3,0%

As you can see the ETF is very highly concentrated and almost 40% of ETFs invest in just two companies.

IShares US Aerospace & Defense ETF ETF Chart, Interval W1. Source: xNUMX XTB.

Another option is to buy shares in SPDR S&P Aerospace & Defense ETF, which provides exposure to the largest companies in the defense and aviation sectors. The benchmark for the ETF is S&P Aerospace & Defense Select Industry. According to data at the end of February 25, 2022, the assets under management (AUM) of this ETF amounted to over $ 1 billion. Currently, the S&P Aerospace & Defense Select Industry ETF consists of 200 companies. Over the last 32 years, the average annual rate of return on this ETF was 10%, which was 15,62 basis points lower than the benchmark (43%). Currently, the annual management fee is now 16,05%. Here is a list of the top 0,35 positions in this ETF:

• Spirit AeroSystems Holdings - 5,0%
• Mercury Systems - 4,9%
• Lockheed Martin - 4,7%
• Howmet Aerospace - 4,6%
• Raytheon Technologies - 4,5%
• TransDigm Group - 4,4%
• General Dynamics - 4,4%
• Northrop Grumman - 4,4%
• L3Harris Technologies - 4,3%
• Hexcel Corporation - 4,3%
• Huntington Ingalls Industries - 4,2%
• BWX Technologies - 4,2%

As you can see the ETF is much less concentrated than iShares Aerospace & Defense (ITA). The two largest components of the SPDR account for less than 10% of the ETF. It is worth mentioning that in the top 10 positions in SPDR S&P Areospace & Defense, as many as 7 coincide with the top ten of ITA.

Shares - companies from the defense sector

Another solution is the individual selection of shares. However, this requires checking what exactly the company does and what prospects it has for the future. Below is a brief summary of several listed companies in the US, Western Europe and Poland. 

Lockheed Martin

It is one of the largest American defense companies. It employs over 115 employees worldwide (including approximately 000 engineers and scientists). The company is best known for the production of world-class aircraft. The strong portfolio resulted from both our own projects and acquisitions of competitors' business lines. For example, in 60 Lockheed took over the military airline from General Dynamics. Thanks to this, Lockheed became the producer of the famous F-000 Fighting Falcon. Other known designs are Lockheed Martin F-1993 Raptor (produced since 16  until 2011) or the F-35 Lightning II (in partnership with BAE Systems and Northrop Grumman). Another segment is the MFC (Lockheed Martin Missiles and Fire Control), in which the company provides defense systems (missiles, rockets) for the US Army, Air Force, Navy and their allies. The products include Javelin (together with Raytheon), JASSM or the THAAD system (Terminal High Altitude Area Defense). Another segment is RMS (Rotary and Mission Systems), in which Lockheed produces, among others radars, sensors or  training systems for soldiers. The company's current capitalization exceeds $ 115 billion.

Lockheed Martin stock chart, interval W1. Source: xNUMX XTB.

Raytheon Technologies

It is the largest arms producer listed on the US stock exchange. According to some, it is the largest arms producer in the world (in terms of revenues). The company was founded in 1922 in Cambridge (Massachusetts). The current company was created as a result of the merger of United Technologies with Raytheon Company. The company's segments can be distinguished, among others, Pratt & Whitney (manufacturer of aircraft engines, including for the F-35 and turbines), Collos Aerospace (including aircraft systems, sensors, etc.). The RIS segment (Raytheon Intelligence & Space) is also worth mentioning. produced by EW (Electronic Warfare), HEL (High Energy Laser) or AESA (Activ Electronically Scanned Array) radars, which are used in the F-18 Super Hornet. The last segment is RMD (Raytheon Missiles & Defense), which produces missiles (the recently famous FG148 Javelin) and the MIM-104 Patriot system. In addition, the RMD segment produces radar and sonar for the navy, as well as drones and anti-drone weapons. The company's current capitalization exceeds $ 150 billion.

Raytheon Technologies stock chart, interval W1. Source: xNUMX XTB.

General Dynamics

It is an American company that produces airplanes and military equipment. In the aviation segment, General Dynamics produces the famous Gulfstream brand aircraft (G500, G600), they are used in civil aviation. The aviation segment generated revenues of $ 2021 billion in 8,1 and generated operating profit of $ 1,03 billion. Another operating segment is the so-called Marine Systems. It produces, among others nuclear submarines or is also the main supplier of auxiliary ships for the US Navy. The segment's revenue was $ 10,5 billion, operating profit was $ 874 million. Another segment in which the company operates is Systemy Walki. General Dynamics designs and manufactures ground combat systems (GDLS, GDELS) as well as weapons and ammunition supported by almost all US Army kinetic systems. In this segment, they deal with, among others modernization of Abrams tanks to M1A2 SEPv3 or production of Hydra-70 missiles. The segment generated revenues of $ 2021 billion in 7,35 and generated an operating profit of $ 1,07 billion. The last segment is technology where the company offers end-to-end solutions. An example is winning a contract worth $ 4,4 billion for DEOS (Defense Enterprise Office Solutons), which is to create a cloud environment in which over 3 million users will work. Last year, the segment generated $ 12,5 billion and achieved an operating margin of 10,2%. The company's current capitalization exceeds $ 60 billion.

Northrop Grumman

It is another American company. It employs over 90 people in many countries around the world. It is also one of the largest companies in the United States, ranking 000th on the Fortune 96 (500) list. The company's most famous product is a stealth bomber  B-2 Spirit. Work is currently underway on the B-21 Raider bomber, which is being developed under the LRS-B (Long Range Strike Bomber) program. The company divides its activities into four segments: Aeronautics Systems, Mission Systems, Defense Systems and Space Systems. The company produces, among others components for such aircraft as the F-18 or F-35. In addition, it also provides drones (including RQ-4 Global Hawk). It is also worth mentioning that Northrop also produces radar systems (eg C4I). It is also worth mentioning that the company also produces equipment for the land forces (e.g. night vision devices). The current capitalization of the company is approximately $ 70 billion.

Northrop Grumman stock chart, interval W1. Source: xNUMX XTB.

Rheinmetall

It is a German arms company that employs 25 people. The history of the company dates back to 000, when the Rheinische Metallwaaren- und Maschinenfabrik AG was established, which dealt with the supply of ammunition for the troops of the German Empire. Currently, the company divides its activity into five segments: weapons and ammunition, sensors and actuators, materials, systems for vehicles, electronic solutions. Rheinmetall generates the most revenue from vehicle systems (1889%), followed by weapons and ammunition (34%), sensors and actuators (22%). The company produces, among others logistics vehicles, vehicle tracking systems, small and medium caliber ammunition, support systems for soldiers, anti-aircraft systems, army simulators or FCS (fire control systems). The biggest customer is the German army. Other directions of export of the company's solutions are Australia, the United Kingdom and the countries of Central Europe. It is a typical medium-sized company in Europe with a market capitalization of no more than € 22bn.

Rheinnmetall stock chart, interval W1. Source: xNUMX XTB.

Leonardo

It is an Italian defense company based in Rome. Interestingly, about 30% of the shares in the company belong to the Italian government, which makes it the company's largest shareholder. The name of the company refers to the great Italian inventor - Leonardo da Vinci. The company's former name was Finmeccanica. Leonardo deals with, among others development, production and maintenance of training and military aircraft. It is part of the cooperation of many defense companies in the Eurofighter program (together with BAE Systems and Airbus Group). In addition, Leonardo is known for the production of helicopters. The company owns AugustaWesstlad, the producer of, among others, 15 seat AW139. Leonardo, in partnership with BAE Systems and the Airbus Group, participates in the MBDA Joint Venture (25% of shares), which is involved in the production of missiles, among others air-to-air (including ASRAAM, Meteor), ground-to-air (Mistral, Rapier), air-to-ground (Apache, Brimstone) or anti-tank (MILAN, HOT). The partnership with Thales (Telespazio) is also worth mentioning. The project develops space systems (e.g. managing satellites in orbit). The company's current capitalization is around € 4,5bn.

Leonardo stock chart, interval W1. Source: xNUMX XTB.

BAE Systems

It is one of the largest defense companies in the world and the largest company of this type in Europe. BAE System is also one of the largest companies listed on the London Stock Exchange, as evidenced by its presence in the FTSE 100 index. The company is an important producer of aviation armaments in Europe. Participates in the development of programs such as Typhoon (Eurofighter) and F-35 Lightning II. Currently, the company is working together with Rolls-Royce, Leonardo and MBDA on the design of the sixth generation aircraft (Tempest), which will be used by the British RAF. BAE Sysyems also produces military drones (HERTI). The company is also involved in the production of missiles capable of carrying nuclear warheads as part of the MBDA project. BAE It is also a producer of nuclear submarines. It is also worth mentioning that the company produces systems for the US Navy - AGS (Advanced Gun Systems). The company's current capitalization is in excess of £ 22 billion.

BAE Systems stock chart, interval W1. Source: xNUMX XTB.

Protector

It is a Lublin-based company dealing mainly with the production of specialist footwear. At the beginning of this century, they acquired 100% of shares in the German company ABEBA. Protektor specializes in the production of safety, work and military footwear. Under the PROTEKTOR brand, the company sells, among others heavy military footwear. The recipients of footwear are mainly uniformed services (army, police) as well as security companies and hobbyists. It is worth mentioning that the PROTEKTOR brand also includes firefighting shoes, which are used during rescue operations. Protektor, together with the acquired German company, also produces professional footwear, which is used, among others, by during construction works. The company is part of the WIG-Clothing index. In 2020, the company produced 635 pairs of shoes. Protektor belongs to Polish small companies, its capitalization amounts to approximately PLN 000 million.

Summation

Contrary to appearances, there are many companies related to the defense sector listed on the stock exchange. The largest defense companies by capitalization are listed on the US stock exchange. However, in Europe you can also find interesting companies from the defense industry that deal with the production of modern weapons (e.g. Euro Fighter). It is worth noting that defense companies, as a rule, do not generate high operating margins. This is due to the fact that they sign contracts with the government and there are usually a lot of companies fighting for tenders. At the same time, companies must stay within the budget for a given project.

Additionally, many of the companies  armaments also has a limited field to export their weapons. For example, US manufacturers of the F-35 must obtain approval to export their aircraft outside the United States. An additional problem with investments in defense companies is the moral aspect. The increase in corporate revenues is due to increasing defense spending. War is always a tragedy because both soldiers and civilians suffer.

Where to invest in stocks and ETFs

An increasing number of forex brokers have quite a rich offer of stocks, ETFs and CFDs for these instruments.

For example on XTB Today, we can find over 3500 equity instruments and 400 ETFs, a Saxo Bank over 19 companies and 000 ETF funds.

Broker
End	Poland	Denmark	Cyprus *
Number of exchanges on offer	16 exchanges	37 exchanges	24 exchanges
Number of shares in the offer	approx. 3500 - shares circa 2000 - CFDs on shares	19 - shares 8 - CFDs on shares	approx. 3 - CFD on shares
The amount of ETF on offer	approx. 400 - ETF approx. 170 - CFD on ETF	3000 - ETF 675 - CFD on ETF	approx. 100 - CFD on ETF
Commission	0% commission up to EUR 100 turnover / month	according to the price list	Spread depends on the instrument
Min. Deposit	PLN 0 (recommended min. PLN 2000 or USD 500, EUR)	0 PLN / 0 EUR / 0 USD	PLN 500
Platform	xStation	SaxoTrader Pro Saxo Trader Go	Plus500 platform
	REVIEW	REVIEW	REVIEW
	CREATE AN ACCOUNT	CREATE AN ACCOUNT	CREATE AN ACCOUNT

* PLUS500 CY offer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.