Which Defense ETF Performs Best? A Comprehensive Analysis for Uncertain Times

The global landscape has grown increasingly volatile in recent years. Regional conflicts in the Middle East, the prolonged Russia-Ukraine war, and rising U.S.-China tensions over Taiwan have created a climate of geopolitical uncertainty. This instability is driving governments worldwide to boost defense spending, creating substantial opportunities for the aerospace and defense sector. For investors seeking exposure to this dynamic industry, the best defense ETF becomes a critical decision. Three prominent options have emerged as leaders: 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 carry Outperform-equivalent ratings from TipRanks’ Smart Score system, but their performance, costs, and portfolio characteristics differ meaningfully.

Why Global Tensions Make Defense ETFs Attractive

Military spending continues to accelerate as nations prioritize national security. This upward trajectory has created a favorable environment for aerospace and defense companies, making sector-specific ETFs an appealing avenue for portfolio diversification. For investors navigating uncertain times, gaining exposure to the best defense ETF offers both strategic positioning and potential growth.

Performance Showdown: Three Leading Defense ETFs Compared

Understanding the performance differences between XAR, ITA, and PPA is essential when selecting the best defense ETF option. Recent data reveals significant divergence in how these funds have delivered returns across different time horizons.

Over the past three years, PPA delivered 14.3% annualized returns, substantially outpacing both XAR (6.3%) and ITA (7.4%). This outperformance extends to the broader market benchmark—the Vanguard S&P 500 ETF (VOO) returned 9.5% annually. Looking at a five-year window, PPA again leads with 11.6% annualized returns, compared to XAR’s 8.6% and ITA’s 5.4%. However, all three lagged the S&P 500’s 15.0% return during the same period. Over a decade, PPA’s 14.6% annualized return exceeds both VOO (13.1%) and XAR (13.3%), though ITA trails significantly at 10.6%.

XAR: Solid Fundamentals, Moderate Returns

XAR, part of the SPDR family, holds 33 stocks from the S&P 500’s aerospace and defense segment. With $2.3 billion in assets under management, the fund’s top 10 holdings represent 49.7% of total assets—a reasonably diversified structure. The portfolio features notable companies including Lockheed Martin (LMT), HEICO (HEI), and Howmet Aerospace (HWM), seven of which hold Outperform-equivalent Smart Scores of 8 or higher. Four holdings achieve perfect 10 scores.

XAR itself carries an Outperform-equivalent ETF Smart Score of 8. The fund’s expense ratio of 0.35% is competitive, translating to just $35 annually on a $10,000 investment. Wall Street consensus reflects a Moderate Buy rating based on 25 Buy recommendations, 9 Holds, and no Sells, with an average price target suggesting 8.33% upside potential.

While XAR offers exposure to high-quality defense names, its historical returns have been underwhelming compared to competitors. The fund provides a stable, reasonably priced option but lacks the outperformance characteristics that distinguish the best defense ETF choices.

ITA: Quality Holdings Weighed Down by Boeing Exposure

BlackRock’s iShares offering holds 36 stocks and aims to track an index composed of U.S. aerospace and defense equities. However, ITA’s portfolio is heavily concentrated—the top 10 holdings account for 76.6% of assets, significantly more than its peers. This concentration is partially attributable to a substantial 9.3% position in Boeing (BA).

The Boeing holding presents a strategic concern. The aerospace giant has faced persistent operational and safety challenges in recent years that have negatively impacted fund performance. Seven of ITA’s top 10 holdings maintain Outperform-equivalent Smart Scores of 8 or above, and the fund itself carries an Outperform-equivalent Smart Score of 8.

ITA’s three-year annualized return of 7.4% edges out XAR but trails the broader market. Five-year and ten-year returns of 5.4% and 10.6%, respectively, further highlight the fund’s mediocre performance trajectory. Wall Street assigns a Moderate Buy consensus based on 28 Buys, 9 Holds, and no Sells, with average price targets suggesting 7.5% upside. The fund’s 0.35% expense ratio matches XAR’s cost-effectiveness, yet the results have disappointed relative to defensive sector peers.

PPA: Superior Performance Justifies Higher Costs

Invesco’s PPA invests in the SPADE Defense Index, focusing on companies involved in U.S. defense, homeland security, and aerospace operations. The fund maintains a broader approach, holding 54 stocks with the top 10 representing 53.6% of assets—a more balanced structure than ITA. Six of its top 10 holdings feature Outperform-equivalent Smart Scores of 8 or higher. PPA itself earned an Outperform-equivalent Smart Score of 8.

Where PPA truly differentiates itself is performance. The fund’s three-year annualized return of 14.3% substantially exceeds both competitors and the S&P 500, making it arguably the best defense ETF for recent performance-seeking investors. This advantage persists across longer time horizons: the five-year 11.6% annualized return and ten-year 14.6% annualized return both surpass peers and broad market benchmarks.

The primary trade-off is PPA’s 0.65% expense ratio—double that of XAR and ITA. On a $10,000 investment, annual fees reach $65. Despite this higher cost, PPA’s recent track record suggests the outperformance more than compensates for the elevated expense burden. Wall Street consensus leans Moderate Buy, with 45 Buy ratings, 10 Holds, and no Sells, implying 6.9% upside potential from recent levels.

The Verdict on the Best Defense ETF

Selecting the best defense ETF hinges on your investment priorities. For cost-conscious investors comfortable with moderate returns, XAR offers reliable exposure with minimal fees. For those seeking quality at a similar price point, ITA’s holdings are strong, though concentration risk and Boeing exposure warrant caution.

For investors prioritizing performance and willing to pay for proven results, PPA emerges as the superior choice. Its consistent outperformance over three, five, and ten-year periods—alongside returns that have beaten the broader market over the past decade—justifies the higher expense ratio. In an era of geopolitical uncertainty and rising defense budgets, PPA represents the most compelling best defense ETF opportunity for disciplined, performance-oriented investors seeking meaningful exposure to aerospace and defense sectors.