Navigating Defence ETF Options: Which Aerospace Investment Fund Offers Superior Returns?

The current geopolitical landscape presents heightened investment risks and opportunities in equal measure. With military conflicts escalating across multiple regions—including ongoing tensions in the Middle East, the Russia-Ukraine situation, and U.S.-China rivalry over Taiwan—governments are increasingly allocating substantial resources to defense and aerospace capabilities. This surge in military expenditure creates a compelling investment thesis, particularly for those seeking exposure to the defence sector through exchange-traded funds. For investors evaluating defence ETF options, three standout candidates merit serious consideration: the SPDR S&P Aerospace & Defense ETF (XAR), the iShares U.S. Aerospace & Defense ETF (ITA), and the Invesco Aerospace & Defense ETF (PPA).

Performance Comparison: Which Defence ETF Delivers Results?

The most critical metric for any investment fund is its track record. Recent data through mid-2024 reveals significant disparities in how these defence ETF vehicles have performed across different time horizons.

PPA emerges as the strongest performer among the three defence ETF options, achieving a remarkable 14.3% annualized return over the past three years. This substantially outpaces both XAR (6.3%) and ITA (7.4%), while also surpassing the broader market’s Vanguard S&P 500 ETF (VOO), which returned 9.5% annually over the same period. Extending the analysis further back, PPA maintained its dominance with an 11.6% five-year annualized return compared to XAR’s 8.6% and ITA’s modest 5.4%. Over the full decade, PPA has delivered a 14.6% annualized return, beating not only its defence-focused competitors but also the S&P 500 benchmark, which posted 13.1% over the same stretch.

XAR, as part of the established SPDR sector ETF family, has provided respectable though less impressive returns. Its 13.3% decade-long performance keeps pace with the broader market, while its shorter-term three and five-year results lag notably behind PPA. ITA, despite holding quality defence holdings, has underperformed across all measured periods, particularly troubling given its mediocre 10.6% decade return.

Cost Structure and Asset Allocation in Defence ETF Investing

Beyond raw returns, the expense ratio significantly impacts long-term wealth accumulation. XAR charges the most competitive fee at 0.35%, with ITA matching this rate. PPA, however, operates at 0.65% annually—nearly double its competitors. On a $10,000 investment, this translates to $35 yearly fees for XAR and ITA versus $65 for PPA.

The question becomes whether PPA’s superior performance justifies this higher cost premium. Given that PPA has outperformed both competitors and the S&P 500 over extended periods, the evidence suggests investors have received material value exceeding the additional fee burden. This represents a classic performance-versus-cost trade-off that tilts favorably toward PPA.

Diversification differs notably across these defence ETF selections. PPA maintains the broadest portfolio with 54 holdings, where the top 10 represent 53.6% of assets. XAR holds 33 stocks with top-10 concentration at 49.7%. ITA, meanwhile, owns 36 positions but exhibits the highest concentration, with its top 10 holdings comprising 76.6% of assets—a potential vulnerability worth noting.

Portfolio Quality: Analyzing Defensive Holdings and Smart Scores

TipRanks’ Smart Score system—a quantitative ranking based on eight market factors where 8-10 denotes “Outperform”—provides insight into portfolio composition quality across these defence ETF vehicles.

Within XAR’s holdings, seven of its top 10 positions carry Smart Scores of 8 or higher, including four with perfect 10 scores: Howmet Aerospace, Lockheed Martin, and HEICO (notably a Warren Buffett position). The fund itself achieved an ETF Smart Score of 8. Similarly, ITA counts seven top-10 holdings with Outperform-equivalent scores, also earning an overall Smart Score of 8.

PPA performs slightly differently, with six of its top 10 holdings achieving Smart Scores of 8+, earning a Smart Score of 8 for the fund itself. While marginally lower than its competitors in this metric, PPA compensates through superior overall performance—suggesting that strategic positioning and market timing matter beyond individual stock quality ratings.

Strategic Risk Factors: Boeing’s Drag and Concentration Concerns

A critical vulnerability in ITA’s structure warrants explicit attention: the fund maintains a substantial 9.3% weighting in Boeing (BA). Boeing has confronted significant operational challenges in recent years—production issues, regulatory complications, and reputational damage—that have materially detracted from ITA’s overall performance. This concentrated exposure to a troubled major holding represents a meaningful headwind for ITA investors moving forward.

ITA’s elevated concentration ratio (76.6% in top 10 holdings) compounds this risk, leaving less room for portfolio diversification to offset individual company disappointments. For conservative investors, this structural vulnerability makes ITA a less attractive defence ETF choice.

Investment Framework: Selecting the Right Defence ETF

For investors constructing their defense sector allocation, the decision hinges on multiple factors:

Performance Seekers will gravitate toward PPA, which has delivered superior returns across all measured intervals. The higher 0.65% expense ratio appears justified by consistent outperformance.

Cost-Conscious Investors might initially favor XAR or ITA’s 0.35% fees, though ITA’s Boeing concentration and overall mediocre returns make XAR the more defensible choice among lower-cost options.

Risk-Averse Allocators should prefer XAR’s more balanced diversification (33 holdings, 49.7% concentration) or PPA’s broader basket (54 holdings, 53.6% concentration) over ITA’s elevated concentration profile.

Active Monitoring Considerations: Wall Street consensus assigns “Moderate Buy” ratings to all three defence ETF options. XAR carries an average price target of $167.29 (8.33% upside), ITA at $157.67 (7.5% upside), and PPA at $120.47 (6.9% upside), based on 45, 28, and 25 analyst buy recommendations respectively.

The Decisive Case for PPA as the Superior Defence ETF

When evaluating these three defence ETF vehicles comprehensively, PPA emerges as the most compelling option for most investors. Despite its higher expense ratio, the fund’s superior three-year, five-year, and decade-long performance fundamentally justifies the additional cost. PPA has not only beaten its defence-focused peers consistently but has also exceeded the broader market’s returns over the full decade—a rare achievement in the actively-benchmarked fund universe.

The fund’s 54-holding structure provides meaningful diversification while maintaining strategic focus on the aerospace and defense ecosystem. Its track record of outperformance in an increasingly uncertain geopolitical environment positions it as the optimal defence ETF for capturing exposure to this compelling sector.

In a world of persistent geopolitical tension and rising military expenditure, investors seeking to benefit from defense industry growth would be well-served by the superior returns demonstrated by this particular defence ETF vehicle. While XAR offers a respectable and lower-cost alternative and ITA maintains quality holdings, neither match PPA’s combination of performance, portfolio construction, and strategic positioning within the defence sector investment landscape.