Geopolitical conflicts are growing that some investors feel guilty about buying defensive stocks

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An F-15E fighter jet can carry seven groups of four StormBreaker bombs.

Source: Raytheon

As the war between Israel and the militant group Hamas escalated last month, Kenneth Suna took to his investment-focused TikTok account.

Suna began a video asking her more than 200,000 followers “if you are good with profiting from the war,” before adding “I am not. ” He went on to name and perform defense-oriented funds including the iShares US Aerospace & Defense ETF stock price history and the SPDR S&P Aerospace & Defense ETF (XAR) stock price history.

“You have a choice where your money goes,” the 38-year-old Washington, DC resident told CNBC. “I would feel guilty.”

Suna is part of a group of everyday investors who transcend the “return at any cost” mentality on moral grounds. As the latest geopolitical conflict escalates, these investors are avoiding defensive stocks despite the market’s axiom that these holdings tend to perform better during times of war.

In fact, the iShares US Aerospace & Defense ETF rallied more than 4% in the week following Hamas’ October 7 attack and went on to end October up about 3.7%. At the same time, the benchmark S&P 500 index added just 0.5% that week and ended the month 2.2% lower.

Ignoring market wisdom

Traders poured sales into defensive stocks and cash after the attack, but inflows have since cooled, according to Vanda Research. A protective giant RTXwhich found Vanda the top pick in the sector among individual investors, has risen 14% since the start of October.

But not everyone sees the growing conflict as a time to invest in defense stocks. Unarmed Funds, a screening tool that measures defensive exposure in portfolios, including the money in your 401(k), recorded a fivefold increase in visits between the attack and early November from the previous 30 days.

Weapon Free Funds is part of a family of tools from nonprofit advocate As You Sow that aims to help people determine whether their fund dollars are invested in companies connected to topics such as guns or deforestation. Andrew Behar, CEO of As You Sow, said that it can be particularly challenging for those who have money in large funds to find out which companies they are investing in.

“The person who receives the money should have the right to decide how it is invested and should be able to invest according to their values,” Behar said. – there is a strong correlation of people who want that, but they don’t know how to do it.”

The screening platform provides letter grade funds. “A” means that no seizures were identified in the military weapon screen, while “F” indicates that there were more than 4%. (For reference, the SPDR S&P 500 ETF (SPY)which tracks the broad S&P 500 index, which earned a “D” rating).

155mm artillery shells are inspected in the production shop at the Scranton Army Ordnance Base on April 12, 2023 in Scranton, Pennsylvania.

Hannah Beier | Getty Images

Critics of defense companies have pointed out that the need for their products can increase in times of heightened geopolitical strife. The effects of the latest war on these industries have already begun to show: General Dynamics CFO Jason Aiken told analysts last month that artillery demand was likely to see “pressure up” as the Israel-Hamas conflict flared up alongside the ongoing war between Russia and Ukraine .

Those with moral credentials have also emphasized the death of the war as a reason for their unhappiness.

The recent increase in interest from Weapon Free Funds exceeded what was seen in February and March 2022 after the Russian invasion of Ukraine, As You Sow said.

That may be linked to differences in public consensus on how these conflicts should play out. While there was overwhelming international support for Ukraine to fight back with weapons, opinion on the Israel-Hamas war appears to be more mixed as are calls for a ceasefire​​​​ growing

Drawing the line

This moral calculation is the latest example of a growing trend of some investors wanting their holdings to reflect personal values. In one of the most recent data points on the relationship, US Bank found that more than four-fifths of Gen Z and millennials would underperform the 10-year return of the S&P 500 to ensure that the companies in which they invested according to their beliefs.

“A common decision-making process is if I have value I’m against war, I don’t want to hold stocks that enable war,” said Brad Barber, a finance professor with a focus on psychology. -investment at the University. of California, Davis. “That’s a very simple way of trying to invest in a way that is consistent with one’s values.”

Meanwhile, Suna said he could feel caught between two schools of thought. There are those who will tell him that war is going to happen anyway, so he might as well see the return on defensive stocks. On the other side of the spectrum, he has heard young people say they don’t invest because no corporation is perfect or because they see the stock market as an unfair system for building wealth.

Suna is left walking a fine line: she believes that investing creates the possibility of retirement one day, but at the same time she needs to feel morally strong about where her money is going. go However, while he said that choices about where to invest can sometimes be difficult or complicated, the decision to avoid defensive stocks was not a particularly difficult loss.

“More and more young people are saying, ‘You know what? You can invest as you want, but I’m not okay with that,'” Suna said. “Everybody draws the line somewhere.”

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