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As Washington grapples with a government shutdown, investors are assessing the threat to defense contractors and aerospace companies.
However, history also suggests that the industry tends to emerge victorious after budget battles. This presents potential opportunities for those considering defense-oriented ETFs.
GACD ETF is up almost 35% YTD. Track its live prices.
Companies such as Lockheed Martin Corp (NYSE:LMT) or Raytheon (RTX Corp (NYSE: RTX) could handle a short shutdown. That’s according to Tony Bancroft, Portfolio Manager of Gabelli Commercial Aerospace & Defense ETF (NYSE:GCAD).
“A brief shutdown— a few days—would be minimal for primes,” Bancroft said, citing Lockheed and Raytheon. “DoD retains ~183,000 funded civilians, and essential missions (e.g., aircraft maintenance, missile defense) continue uninterrupted,” he added.
Also Read: How A Government Shutdown Could Turn A Hot IPO Stream Cold
Painful, though, might be for subcontractors and service providers. “…halted payments for IT support, facility management, and R&D contracts could idle thousands of workers. Small firms, with thin margins, warn this erodes the industrial base,” Bancroft further added.
If the standoff lasts for weeks, the harm could become more severe. Referencing the 35-day 2018-19 shutdown, Bancroft warned: “expect broader fallout: contractors implementing unpaid furloughs or layoffs, exacerbating cash crunches already strained by FY2025’s unresolved funding gaps. Agencies like the Air Force and Navy could delay procurement, stalling F-35 upgrades or hypersonic programs.”
Despite these threats, defense stocks have historically weathered shutdowns. The S&P 500, notes Bancroft, averaged +0.3% during such periods, going up 55% of the time, while “defense stocks often outperform, gaining 5.2% vs. the index’s 3% since 1995, thanks to “essential” funding guarantees.”
Nevertheless, short-term volatility may undermine investor confidence. “That said, expect initial selling pressure on contractor-heavy names (e.g., -2-5% dips in 2018).,” Bancroft explained. “With no full-year defense bill in sight, prolonged uncertainty could sap momentum from this year’s rally, GCAD (Gabelli Commercial Aerospace & Defense) ETF +30% YTD, it could create entry points for long-term bulls betting on $1T+ future budgets.”
For the moment, GCAD’s performance suggests that investors are continuing to wager that defense remains too critical to be sidetracked by political posturing.
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