An incoming presidential administration opens the door for policy discussions on spending, which includes defense. Ahead of his inauguration later this month, president-elect Donald Trump is already calling on NATO to open its wallets for this type of spending.
Global tensions continue to remain a concern, including the ongoing Russia-Ukraine conflict. Given this, President-elect Trump is already starting to apply some political pressure on NATO to increase its defense spending efforts.
In terms of a percentage increase, Trump mentioned 5%. This would mean more than double the spending NATO is currently pledging to spend on these efforts.
“There has, however, been a quiet reckoning that European NATO members will have to reach deeper into their pockets to revive a sluggish defense industrial complex and counter a potential Russian threat,” noted the publication DW. “Still, several analysts told DW that increasing defense spending to 5% appeared impossible in the current economic environment, even for relatively wealthier nations.”
European nations in particular have been called on to up the ante when it comes to defense spending. NATO chief Mark Rutte said in the DW publication that Russia is investing 7%-8% of its gross domestic product on such spending and European nations need to shift toward a “wartime mindset.”
“On average, European countries easily spend up to a quarter of their national income on pensions, health and social security systems,” Rutte said. “We need a small fraction of that money to make our defenses much stronger, and to preserve our way of life.”
Increased spending can certainly bode well for defense companies. It also opens the pathway for traders to take a closer look at opportunities in aerospace and defense.
Leverage the Defense Industry
Any companies that benefit from this increased spending in the short term can prop up the stocks of companies that manufacture technology that benefits the military. This includes names like GE Aerospace, Raytheon Technologies, and Lockheed Martin. All three companies comprise the top holdings in the Direxion Daily Aerospace & Defense Bull 3X Shares ETF (DFEN ).
Traders can choose to trade individual stocks, but DFEN allows for industrywide exposure. The ETF seeks daily investment results equal to triple the exposure to the Dow Jones U.S. Select Aerospace & Defense Index. Traders can maximize their profit potential with the 3x exposure if near-term news happens to prop up defense-related stocks. This helps eliminate the concentration risk inherent in choosing individual stock holdings.
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