S&P 500: Russia’s War On Ukraine Makes Defense Investors $49 Billion Richer

Russia’s attack on Ukraine sparked a global humanitarian and political crisis. But S&P 500 investors are still finding ways to engage in defense companies helping nations defend themselves as war rears its ugly head again.

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Investors have already posted $48.6 billion in stock gains on the 32 major defense and aerospace stocks in the largest ETF of its kind, the iShares U.S. Aerospace & Defense ETF (ITA), says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.

The ETF itself is up roughly 6% from Russia’s initial Feb. 24 attack on Ukraine. That’s more six times the 1.3% rise in the S&P 500 in that time. Analysts, too, see more upside in a year’s time in more than three-quarters of the stocks in the top defense ETF. And not just a little rise — they’re calling for an average 20% gain.

And yet, the top defense ETF doesn’t show the magnitude of gains seen in the defense and aerospace industry in the wake of Russia’s attack. The 32 U.S.-traded stocks in the ETF, on average, are up nearly 11% from the attack and more than 2.9% this year so far. The S&P 500 itself, measured by the SPDR S&P 500 ETF Trust (SPY), is down 10% this year.

“Russia’s invasion of Ukraine, representing Europe’s worst security crisis since World War II, has sparked global outrage,” said Jack Ablin, strategist at Cresset Capital. “The court of public opinion clearly supports the Ukrainian people and their president, Volodymyr Zelenskyy.”

Many of the ETFs and defense stocks have run up. But analysts still see upside for many remaining.

Targeting The S&P 500 Defense ETFs

With assets of more than $3 billion, iShares U.S. Aerospace & Defense is twice the size of its next biggest rival, the SPDR S&P Aerospace & Defense ETF (XAR).

But defense is not a massive area for ETFs. There are now only three major ETFs to choose from for investors looking to buy into the sector. The third is the relatively small Invesco Aerospace & Defensive (PPA), with $780 million in assets. And in a case of bad timing for an ETF, the VictoryShares Protect America ETF shut down late last year. And it’s easy to see why: Shares of defense companies largely lagged the S&P 500 over the past five years.

The iShares U.S. Aerospace & Defense ETF, for instance, is up just 43% over the past five years. That far trails the 78.6% gain by the S&P 500 during that time. Part of the underperformance is due to its No. 1 holding, a 23% position in Raytheon Technologies (RTX). Shares of Raytheon are down more than 12% in five years. That’s tried the patience of defense and aerospace investors. “iShares US Aerospace & Defense ETF is a highly concentrated industry ETF,” said Todd Rosenbluth, head of mutual fund and ETF research at CFRA. “This megacap focus provides both stability due to strong balance sheets and recurring cash flow but potentially limited growth compared to small-cap companies.”

But S&P 500 analysts are starting to warm up to the sector — just not in the obvious places. On average, they see the 32 stocks in the iShares U.S. Aerospace & Defense ETF, with current price targets, gaining 14.2% over the next 12 months.

Analysts Like These Defense Stocks Best

SPDR S&P Aerospace & Defense ETF, on the other hand, “takes an equally weighted approach with significant exposure to smaller companies,” Rosenbluth says.

Take one of its holdings: Maxar Technologies (MAXR). The company provides space imagery of the kind useful in monitoring military events in Europe. Shares are up more than 44% from the time war broke out. That gain alone added $784 million in market value for investors. But even so, analysts think this stock still has more than 15% upside until hitting its 12-month price target of 40.75. Additionally, the company is seen making 54 cents a share (or more than $41 million in profit) in 2022, snapping many years of losing money.

Looking At The S&P 500 Defense Giants

Analysts, though, are less bullish on the obvious defense giants that already ran up. Northrop Grumman (NOC) already pulled 4% past analysts’ 12-month price target on the stock. Shares are up a powerful 17% since the war began, putting nearly $10 billion into investors’ portfolios. It’s a similar story with Lockheed Martin (LMT). Following a 26% run-up just this year, and 15% since the war, shares cruised past analysts’ price target by some 0.8%.

But opportunity still abounds. Nations will need to take serious looks at their defenses.

Defense Stocks Up The Most Since The Russia/Ukraine War

Top gainers since the Feb. 24 attacks

Sources: IBD, S&P Global Market Intelligence based on holdings in iShares U.S. Aerospace & Defense ETF