Why Defense Stocks ETF Are Gaining Traction: Which Aerospace Fund Dominates?

The global geopolitical landscape has grown increasingly complex and unstable. From Middle Eastern conflicts to the ongoing Russia-Ukraine tension and U.S.-China disputes over Taiwan, international uncertainties continue to mount. This volatile environment has triggered a wave of government spending on military capabilities and aerospace technology, positioning defense stocks ETF as an attractive investment avenue for those seeking exposure to this resilient sector.

Several prominent defense stocks ETF options have emerged to capture this trend, including the SPDR S&P Aerospace & Defense ETF (XAR), the iShares U.S. Aerospace & Defense ETF (ITA), and the Invesco Aerospace & Defense ETF (PPA). All three have earned Outperform-equivalent TipRanks Smart Scores, yet they offer distinct characteristics and performance profiles. Understanding the differences between these funds is crucial for investors evaluating defense stocks ETF options.

Performance Divergence: A Critical Differentiator Among Defense Stocks ETF

When comparing these three defense stocks ETF over multiple time horizons, a clear performance hierarchy emerges. Recent data reveals substantial variations in how effectively each fund has captured aerospace and defense sector growth.

The Invesco offering (PPA) has demonstrated exceptional strength, delivering a three-year annualized return significantly ahead of its peers. XAR generated solid but more modest returns, while ITA’s performance lagged noticeably behind both competitors over similar periods. Over a five-year horizon, this gap has only widened, with PPA continuing to outpace the broader market indices that many passive investors use as benchmarks. Over the past decade, PPA’s cumulative performance has been particularly impressive, outperforming both the overall equity market and its defense-focused rivals.

SPDR’s XAR: Diversification Without Stellar Returns

XAR maintains a portfolio of 33 aerospace and defense stocks, with its top 10 holdings representing approximately half of fund assets. The fund manages a reasonable diversification level and benefits from strong individual stock quality—seven of its top 10 holdings feature high Smart Scores of 8 or above. Notable positions include Lockheed Martin, Howmet Aerospace, and HEICO, which has benefited from Warren Buffett’s investment thesis.

The fund’s expense ratio stands at 0.35%, a competitive rate for this asset class. Wall Street analysts assign a Moderate Buy consensus with an average price target implying single-digit upside potential. However, XAR’s total returns, while respectable, have not matched the performance of PPA, raising questions about whether the fund adequately captures the sector’s growth potential.

ITA’s Concentration Challenge: Risks in the Defense Stocks ETF Space

BlackRock’s iShares offering takes a different approach, holding 36 defense stocks ETF with a more concentrated structure. Its top 10 holdings account for over 75% of fund assets, creating meaningful concentration risk. Among these holdings sits a substantial position in Boeing, which has faced significant operational and safety-related headwinds in recent years. This large weighting in a challenged name has meaningfully detracted from overall performance.

ITA also carries a 0.35% expense ratio, matching XAR’s cost structure. Its Wall Street consensus similarly reflects moderate buying interest with modest upside targets. The fund’s returns over three, five, and ten-year periods have trailed XAR and significantly underperformed PPA, suggesting that its more concentrated approach and Boeing exposure have become strategic liabilities rather than advantages in the current environment.

PPA: The Standout Defense Stocks ETF Performer

Invesco’s aerospace and defense fund distinguishes itself through both breadth and performance. With 54 holdings in its portfolio and top 10 positions representing approximately half of assets, PPA achieves better balance than ITA while maintaining quality. The fund allocates across the full spectrum of defense, homeland security, and aerospace operations, reflecting the SPADE Defense Index methodology.

PPA’s track record speaks loudly. Over the most recent complete multi-year periods, the fund has substantially outpaced both XAR and ITA while also exceeding the Vanguard S&P 500 ETF over the past decade—a significant achievement given how difficult it is for sector funds to beat broad market returns over extended periods. This performance advantage persists even when accounting for a higher 0.65% expense ratio.

The fee differential—charging double the expense ratio of its competitors—initially appears as a drawback. However, when performance is measured net of fees, PPA’s returns remain superior, suggesting that the fund’s active or smart-beta indexing approach adds genuine value. For investors willing to pay moderately higher fees in exchange for genuinely superior long-term outcomes, PPA addresses this trade-off effectively.

The Investment Decision: Why Performance Matters in Defense Stocks ETF Selection

Wall Street consensus assigns all three defense stocks ETF a Moderate Buy rating, indicating reasonable support across the analyst community. However, consensus ratings alone cannot resolve the choice between these options.

The decision ultimately hinges on whether an investor prioritizes lower costs at the potential sacrifice of returns (favoring XAR or ITA) or superior long-term performance justified by modestly higher fees (favoring PPA). Given the extended track record of outperformance and the structural advantages of PPA’s approach to defense stocks ETF construction, the case for PPA proves compelling.

The broader geopolitical backdrop—which shows few signs of stabilization—reinforces why defense stocks ETF merit serious consideration. Among the available options, PPA presents itself as the most effective vehicle for gaining differentiated exposure to this resilient sector. Its performance history, diversification approach, and alignment with sector tailwinds position it as the optimal choice for investors seeking meaningful aerospace and defense exposure through an ETF structure.