Israel–Hamas war boosts U.S. defense ETFs, but why it won't help stocks for long

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CFRA analysts maintain a neutral stance on the defense sector since the geopolitical unrest doesn’t move the needle in terms of global defense spending

Hello! This is MarketWatch reporter Isabel Wang bringing you this week’s ETF Wrap. In this week’s edition, we look at defense ETFs, which have rallied on the back of the Middle East conflict since the Palestinian militant group launched surprise cross-border raids from Gaza 13 days ago, pushing the region to the precipice of a dangerous abyss.

ITA, with over $5 billion in assets under management, attracted over $93 million of net inflows in the week to Wednesday, while the $2 billion PPA saw net inflows of $61 million last week, its best showing since July 2022, and the $2 billion XAR recorded a total inflow of $32 million over the same period, according to FactSet data.

The narrative, despite logically sound, does not hold much water as it ignores how long in advance militaries procure weapons, and how they’re subject to strategic and political constraints, Owens said in a blog post. Ullal, in a phone interview, told MarketWatch that there’s a fair amount of headwinds weighing on the defense ETF sector. For example, the supply-chain constraints could lead to a backlog that takes time to translate to corporate sales and profits, while the multi-year fixed-price weapon contract could result in lower margins given the high inflation, he said.

The debt-ceiling agreement negotiated between House Republican leaders and President Joe Biden earlier this year would cap the defense budget topline at the requested $886 billion for fiscal 2024, a 3.3% increase over this year.

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Israel–Hamas war boosts U.S. defense ETFs, but why it won't help stocks for longCFRA analysts maintain a neutral stance on the defense sector since the geopolitical unrest doesn’t move the needle in terms of global defense spending
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