Navigating Top Defense Sector ETFs: A Comprehensive Performance Analysis

Global tensions and military spending surges create compelling investment opportunities in the aerospace and defense sector. With multiple ETF options available, investors often struggle to determine which vehicles provide the most effective exposure to this growing industry. This analysis examines three prominent funds designed to capture defense sector growth, comparing their performance, holdings quality, and cost structures to identify optimal investment choices.

Understanding the Defense ETF Landscape

The geopolitical environment—marked by regional conflicts, technological competition between major powers, and evolving security threats—has driven unprecedented defense sector investment. Three leading ETFs have emerged as popular choices: the SPDR S&P Aerospace & Defense ETF (XAR), the iShares U.S. Aerospace & Defense ETF (ITA), and the Invesco Aerospace & Defense ETF (PPA). Each offers different approaches to capturing defense industry returns, with varying levels of concentration, cost structures, and historical performance.

All three funds maintain Outperform-equivalent ratings from TipRanks’ Smart Score analysis, but their track records tell distinctly different stories. The choice between them hinges on specific investment priorities: whether an investor prioritizes lower costs, broader diversification, or superior long-term returns.

XAR: The Balanced Aerospace & Defense Play

The $2.3 billion SPDR fund maintains a relatively conservative approach, holding 33 aerospace and defense stocks with top 10 positions representing 49.7% of assets. This composition strikes a middle ground between concentration and diversification. Seven of its top 10 holdings carry Smart Scores of 8 or higher, including perfect 10 ratings for companies like Howmet Aerospace, Lockheed Martin, and HEICO—a position notably favored by major institutional investors.

As a Sector SPDR offering, XAR tracks the aerospace and defense segment of the S&P 500, providing direct exposure to established defense contractors. The fund’s 0.35% expense ratio ranks among the most competitive in this category, keeping investor costs minimal.

Historically, XAR has generated steady but moderate returns. Over three-year, five-year, and ten-year periods, the fund has delivered 6.3%, 8.1%, and 13.3% annualized returns respectively. While these results demonstrate consistent performance, they generally trail the broader equity market and lag behind alternative defense-focused vehicles over recent periods.

ITA: Concentrated Exposure with Boeing Risk

BlackRock’s iShares offering focuses on U.S. aerospace and defense equities through an index-tracking approach. The fund manages 36 stocks, but its portfolio exhibits higher concentration than competitors, with top 10 holdings accounting for 76.6% of assets. This concentration raises diversification concerns.

A notable portfolio decision involves the substantial 9.3% allocation to Boeing. Given the aircraft manufacturer’s well-documented operational and quality challenges in recent years, this heavyweight position represents a material headwind to fund performance. Seven of ITA’s top 10 holdings maintain Outperform-equivalent Smart Scores, comparable to XAR’s composition quality.

ITA matches XAR’s attractive 0.35% expense ratio. However, historical returns tell a cautionary tale. The fund has posted three-year, five-year, and ten-year annualized returns of 7.4%, 5.4%, and 10.6% respectively. The five-year performance particularly underperforms, reflecting Boeing’s drag on overall results. For investors seeking diversified defense exposure without concentrated single-stock risk, ITA’s portfolio construction presents challenges.

PPA: Superior Long-Term Performance

The Invesco Aerospace & Defense ETF takes a broader approach, investing in companies across the defense, homeland security, and aerospace landscape. Managing 54 stocks with top 10 holdings comprising 53.6% of assets, PPA offers superior diversification compared to its rivals. Six of its top 10 positions feature Outperform-equivalent Smart Scores.

The fund’s performance differentiates it decisively from competitors. Over the three-year period, PPA achieved a 14.3% annualized return—substantially exceeding both the broader S&P 500’s 9.5% performance and competitors’ results (XAR at 6.3%, ITA at 7.4%). This outperformance pattern extends through five-year returns (PPA’s 11.6% versus 8.6% for XAR and 5.4% for ITA) and ten-year periods (PPA’s 14.6% versus 13.3% for XAR and 10.6% for ITA).

Notably, PPA outpaced the broader market over the full decade, something neither XAR nor ITA accomplished. This sustained outperformance reflects superior stock selection, better sector rotation, or both.

The tradeoff involves cost. PPA’s 0.65% expense ratio—roughly double competitors’ fees—constitutes $65 annually per $10,000 invested versus $35 for XAR and ITA. However, PPA’s historical returns substantially exceed this fee differential, suggesting investors have received meaningful value for the additional cost.

Comparing the Defense ETF Trio

Performance Summary:

• 3-Year Returns: PPA (14.3%) > ITA (7.4%) > XAR (6.3%)
• 5-Year Returns: PPA (11.6%) > XAR (8.1%) > ITA (5.4%)
• 10-Year Returns: PPA (14.6%) > XAR (13.3%) > ITA (10.6%)

Cost Comparison:

• XAR & ITA: 0.35% expense ratio ($35 per $10,000)
• PPA: 0.65% expense ratio ($65 per $10,000)

Risk Considerations: XAR provides balanced exposure without concentrated single-stock vulnerabilities. ITA’s substantial Boeing allocation creates measurable performance drag and concentration risk. PPA’s broader holdings reduce single-name risk while maintaining quality standards through Smart Score filtering.

Which Defense ETF Represents the Best Choice?

Wall Street consensus supports all three funds, with moderate buy ratings predominating. However, historical returns and forward guidance suggest PPA emerges as the optimal choice for investors prioritizing performance over cost minimization.

While PPA’s higher fee structure may initially deter cost-conscious investors, the fund’s consistent outperformance across three, five, and ten-year periods has delivered returns substantially exceeding its fee premium. When an investment vehicle outperforms the broader market over a decade while outpacing comparable alternatives in the same category, the higher cost becomes justified.

For investors tolerating moderate expenses in exchange for superior long-term returns, PPA offers the most compelling risk-adjusted opportunity within the defense sector. XAR appeals to cost-sensitive investors accepting moderate returns, while ITA warrants caution due to Boeing concentration risks and historically weaker results.

Given continued geopolitical complexity and secular defense spending growth, defense ETFs remain attractive portfolio components. Among available options, PPA positions investors most effectively to capture this opportunity.