Finding the Best Defense ETFs: A Strategic Guide Amid Global Uncertainty

The global security landscape continues to shift dramatically, with persistent conflicts reshaping military priorities and defense spending trajectories across nations. This environment of heightened geopolitical risk has created a compelling investment thesis: as countries strengthen their defense capabilities, the aerospace and defense sector stands to benefit substantially. For investors seeking exposure to this resilient industry, Exchange-Traded Funds offer a practical pathway. Three prominent defense ETFs—the Invesco Aerospace & Defense ETF (PPA), the SPDR S&P Aerospace & Defense ETF (XAR), and the iShares U.S. Aerospace & Defense ETF (ITA)—have emerged as the leading vehicles in this space, each with distinct characteristics and performance profiles.

Performance: The Primary Differentiator Among Defense ETF Options

When evaluating the best options for defense sector investment, historical returns provide crucial insight. Over the past three years, PPA has delivered an annualized return of 14.3%, substantially outpacing the broader S&P 500 benchmark (which achieved 9.5% through the Vanguard S&P 500 ETF, or VOO) and decisively surpassing both XAR’s 6.3% and ITA’s 7.4% returns. This performance advantage extended further: PPA generated an 11.6% five-year annualized return compared to XAR’s 8.6% and ITA’s 5.4%.

Over a full decade, PPA maintained its leadership position with a 14.6% annualized return, even exceeding the broader market’s 13.1% performance, while XAR posted 13.3% and ITA lagged at 10.6%. What emerges from this data is clear: among the three defense ETFs, PPA has consistently delivered superior risk-adjusted returns, making it the most compelling choice for long-term investors prioritizing growth and outperformance.

Invesco Aerospace & Defense ETF: The Performance Leader

PPA’s competitive advantage stems from its strategic index methodology. The fund tracks the SPADE Defense Index, which captures a diversified basket of 54 companies involved in U.S. defense, homeland security, and aerospace operations. This broader approach—compared to competitors’ more concentrated holdings—has proven instrumental in PPA’s outperformance.

The fund’s portfolio quality is evident in its Smart Score ratings, a quantitative assessment system developed by TipRanks that evaluates stocks across eight key market factors on a scale of one to ten. PPA holds six companies with scores of 8 or higher (indicating Outperform-equivalent strength) within its top 10 holdings. The fund itself carries an Outperform-equivalent ETF Smart Score of 8.

However, potential investors must contend with PPA’s 0.65% expense ratio, translating to $65 annually on a $10,000 investment. This cost structure is notably higher than industry peers, yet the historical performance data suggests this premium may be justified when measured against long-term wealth creation and relative outperformance.

Wall Street sentiment reinforces this assessment, with PPA earning a Moderate Buy consensus rating based on 45 Buy, 10 Hold, and zero Sell recommendations from analysts. The average price target of $120.47 implies approximately 6.9% upside potential from prevailing levels.

SPDR S&P Aerospace & Defense ETF: Quality Holdings, Moderate Returns

The SPDR S&P Aerospace & Defense ETF brings a focused $2.3 billion portfolio of 33 companies selected from the S&P 500’s aerospace and defense sector. With its top 10 holdings representing 49.7% of fund assets, XAR maintains better diversification than its most concentrated peer while concentrating capital more than PPA’s broader approach.

The fund’s portfolio demonstrates impressive Smart Score credentials: seven of its top 10 holdings carry Outperform-equivalent ratings (8 or higher), including four perfect scores. Notable holdings include Howmet Aerospace, Lockheed Martin, and HEICO—notably, one of Warren Buffett’s recent investment additions.

XAR’s 0.35% expense ratio is notably economical, the lowest among the three defense-focused options examined. Yet despite this cost advantage, the fund’s historical performance tells a different story. At 6.3% annualized over three years and 8.1% over five years, XAR’s returns trail both the broader market and superior-performing competitors. XAR does feature a respectable 13.3% 10-year return, though PPA’s 14.6% represents slightly stronger long-term performance.

Analysts maintain a Moderate Buy stance on XAR, backed by 25 Buy, 9 Hold, and zero Sell ratings. The $167.29 average price target suggests 8.33% potential upside, though this modest projection reflects cautious confidence rather than enthusiasm.

iShares U.S. Aerospace & Defense ETF: Concentrated Exposure With Boeing Risk

BlackRock’s iShares offering in the aerospace and defense space tracks an index of U.S. equities in the sector, encompassing 36 stocks with top 10 holdings representing 76.6% of the fund—the highest concentration among the three options. This structural choice reduces diversification benefits inherent in ETF investing.

A particular concern looms over ITA’s 9.3% weighting in Boeing, a company that has encountered significant operational and quality challenges in recent years. This substantial single-company exposure has materially impacted fund performance, creating a meaningful drag on returns during periods when Boeing underperforms.

ITA’s portfolio nonetheless contains seven of ten top holdings with Outperform-equivalent Smart Scores. The fund carries an Outperform-equivalent ETF Smart Score of 8 and maintains a competitive 0.35% expense ratio matching XAR’s pricing.

Performance metrics, however, reveal limitations: ITA returned 7.4% annualized over three years, 5.4% over five years, and 10.6% over ten years. These figures underperformed both the broader market and competitor PPA across all measured timeframes. The significant Boeing position appears to have specifically suppressed fund returns relative to peers focusing more broadly on healthy aerospace and defense manufacturers.

Analysts assign ITA a Moderate Buy rating based on 28 Buy, 9 Hold, and zero Sell recommendations, with an average $157.67 price target implying 7.5% upside potential.

The Investment Decision: Balancing Cost, Diversification, and Returns

For investors evaluating the best defense ETFs for portfolio allocation, the decision framework centers on three primary considerations:

Return Potential: PPA’s track record of consistent outperformance across three, five, and ten-year periods demonstrates that superior returns are achievable within the defense sector. Investors with 5+ year horizons should weight this performance advantage heavily.

Cost Structure: While PPA’s 0.65% expense ratio exceeds competitors by 0.30 percentage points, the historical 6-8% performance advantage over both XAR and ITA typically offsets this incremental cost many times over across longer investment periods.

Portfolio Composition: PPA’s 54-stock composition and lower concentration in individual names reduces single-company risk. In contrast, ITA’s heavy Boeing weighting introduces specific company risk that has demonstrably detracted from returns.

Conclusion: PPA Emerges as the Best Defense ETF

When synthesizing performance data, cost analysis, holdings quality, and Wall Street consensus ratings, PPA stands as the superior choice among defense-focused investment vehicles. While its expense ratio exceeds alternatives, the fund’s consistent track record of outperforming both peers and broader market benchmarks justifies this structural cost differential. The fund’s exposure to 54 diversified defense and aerospace companies, combined with robust Smart Score ratings and analyst support, positions PPA as the most effective mechanism for gaining resilient, long-term exposure to the defense sector.

In an environment characterized by sustained geopolitical tension and elevated defense spending, PPA offers investors a defense ETF solution that delivers both the growth potential and relative stability this sector provides. For those committed to a strategic allocation to defense industry exposure, PPA represents not merely a viable option, but the best path forward.