Over the last month, the main “defense” ETFs are up double digits, signaling that the market has already repriced higher defense budgets.
Here’s where it gets uncomfortable.
Most investors think they’re trading defense. In reality, they are trading a blend of aerospace and defense, concentrated in a handful of large commercial aerospace names, whether they realize it or not.
In fact, +35% of the top “defense” ETF is commercial aerospace.
Of course, the ETFs already moved directionally as a group. We’re late there.
However, from here, returns come from sorting out the individual components inside them.
In other words, we’re early on dispersion (returns separating within the sector).
Intra-sector breadth can be traded with spreads.
What I’ll show you in the full Letter
Explain why being “right on defense” is no longer enough to generate excess returns (aka just being long an ETF)
Break down where defense ETFs are misaligned with defense budgets, and how that misalignment is starting to matter
Show how to express the next phase of the trade through dispersion (returns separating within the sector) using relative-value trades instead of broad sector moves
I. What’s Actually Happening
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