Navigating Geopolitical Uncertainty: Which Defense Stock ETF Deserves Your Portfolio?

The global landscape presents mounting uncertainties across multiple regions. Tensions persist in the Middle East, the Ukraine-Russia conflict continues to evolve, and U.S.-China relations remain strained over Taiwan. These geopolitical pressures have catalyzed unprecedented increases in defense spending among nations worldwide, seeking to strengthen military capabilities and prepare for potential threats. This environment creates a compelling investment thesis for defense stock ETF exposure, with several prominent funds offering distinct approaches to capturing gains in the aerospace and defense sector.

The Rising Case for Defense Stock ETF Investments

For investors seeking exposure to the defense industry, three major defense stock ETF options stand out: the SPDR S&P Aerospace & Defense ETF (XAR), the iShares U.S. Aerospace & Defense ETF (ITA), and the Invesco Aerospace & Defense ETF (PPA). Each fund provides access to companies involved in military equipment manufacturing, aerospace operations, and defense technology. All three defense stock ETF options currently receive Outperform-equivalent ratings from TipRanks’ Smart Score system, yet their underlying strategies, cost structures, and historical performance differ significantly.

Understanding which defense stock ETF aligns with your investment objectives requires evaluating three critical dimensions: long-term performance track records, expense ratios that impact net returns, and portfolio composition reflecting different risk-diversification philosophies.

Comparing the Top Three Defense Stock ETFs: Performance, Costs, and Strategy

To evaluate these defense stock ETFs effectively, consider how they stack up across key metrics:

Performance Comparison Across Time Horizons: Over the past three years, PPA delivered an annualized return of 14.3%, substantially outpacing both XAR’s 6.3% and ITA’s 7.4%. The gap widens when examining five-year returns: PPA generated 11.6% annualized returns, compared to XAR’s 8.6% and ITA’s 5.4%. Over a decade, PPA posted 14.6% annualized gains, surpassing the broader market’s S&P 500 performance (13.1% via Vanguard’s VOO), while XAR achieved 13.3% and ITA lagged at 10.6%.

Cost-Performance Trade-Off: XAR and ITA each charge expense ratios of 0.35%, translating to $35 annually per $10,000 invested. PPA, however, carries a higher 0.65% expense ratio ($65 per $10,000), double that of its competitors. Despite this cost disadvantage, PPA’s superior performance suggests investors receive tangible value for the higher fees.

Portfolio Composition and Diversification: XAR holds 33 stocks with its top 10 positions representing 49.7% of assets, providing moderate diversification. ITA owns 36 stocks but concentrates 76.6% in its top 10 holdings, creating higher concentration risk. PPA spreads exposure across 54 stocks with top 10 holdings at 53.6% of assets, offering broader diversification than ITA while maintaining meaningful focus on its best opportunities.

XAR: The Traditional Defense Stock ETF Approach

As part of the popular Sector SPDR series, XAR invests specifically in the aerospace and defense sector within the S&P 500. The $2.3 billion fund demonstrates strong portfolio quality, with seven of its top 10 holdings featuring Smart Scores of 8 or higher. Notable positions include Howmet Aerospace (HWM), Lockheed Martin (LMT), and HEICO (HEI)—notably one of Warren Buffett’s preferred holdings.

XAR earns a Moderate Buy consensus rating from Wall Street, based on 25 Buy recommendations against zero Sells. The average price target of $167.29 suggests approximately 8.33% upside potential. However, despite its quality portfolio and reasonable 0.35% expense ratio, XAR’s relative underperformance compared to PPA raises questions about its ability to capitalize fully on the defense spending boom.

ITA: The Concentrated Diversification Challenge

BlackRock’s iShares offering tracks an index of U.S. equities specifically in aerospace and defense. Like XAR, ITA contains many quality holdings with seven of its top 10 stocks carrying Outperform-equivalent Smart Scores. However, ITA’s significant position in Boeing (BA) at 9.3% of assets presents a notable concern. Boeing has faced substantial operational challenges in recent years that have weighed on fund performance.

ITA also carries a Moderate Buy consensus from Wall Street, with 28 Buy ratings and zero Sells. Its average price target of $157.67 implies 7.5% upside potential. The fund’s higher concentration risk (76.6% in top 10 holdings) combined with Boeing’s challenges positions ITA as the less attractive option among the three defense stock ETF choices for risk-conscious investors.

PPA: The Superior Defense Stock ETF Option

Invesco’s PPA follows the SPADE Defense Index, encompassing companies involved in U.S. defense, homeland security, and aerospace operations. The fund’s broader mandate captures 54 stocks, with top 10 holdings at 53.6% of assets, balancing focus with diversification.

PPA’s performance substantially exceeds both competitors and the broader market. Its 14.3% annualized return over three years outpaced the S&P 500’s 9.5% significantly, while its 14.6% decade return even surpassed the market’s 13.1%. This consistent outperformance across multiple timeframes validates PPA as the most effective defense stock ETF for capturing gains in the sector.

Wall Street consensus rates PPA as a Moderate Buy based on 45 Buy recommendations against 10 Holds and zero Sells. The average price target of $120.47 implies 6.9% upside potential. While PPA’s 0.65% expense ratio exceeds those of competitors, the fund’s track record demonstrates that investors have received superior risk-adjusted returns justifying the higher cost.

PPA features six of its top 10 holdings with Outperform-equivalent Smart Scores, providing portfolio strength comparable to its competitors while delivering measurably better results.

The Verdict for Defense Stock ETF Investors

For investors prioritizing long-term growth exposure to the defense industry, PPA emerges as the optimal choice among major defense stock ETF options. Its consistent outperformance across three, five, and ten-year periods, combined with superior diversification and strong portfolio quality, validates its position despite higher fees.

The global security environment remains uncertain and likely to persist in supporting elevated defense spending. Whether through individual stocks or a diversified fund approach, defense stock ETF exposure represents a meaningful portfolio component for many investors. However, among the three primary options available, PPA’s track record, management approach, and risk-return characteristics position it as the most attractive defense stock ETF for capturing sustainable gains from this secular trend.