Military ETF Showdown: Finding Your Best Entry Point in Defense Stocks

The Case for Defense Sector Exposure

Geopolitical tensions are no longer background noise—they’re front and center. The Middle East remains volatile, the Russia-Ukraine conflict shows no signs of cooling, and U.S.-China relations over Taiwan keep markets on edge. For investors, this isn’t just headlines; it’s a fundamental shift in how governments allocate capital. Defense spending is climbing globally as nations prioritize military readiness, creating a compelling opportunity within the defense and aerospace sectors.

The question isn’t whether to invest in military-adjacent assets, but how. Several major ETFs track the defense industry, and understanding their distinctions can make the difference between solid returns and missed opportunities. Three standouts worth examining are the SPDR S&P Aerospace & Defense ETF (XAR), the iShares U.S. Aerospace & Defense ETF (ITA), and the Invesco Aerospace & Defense ETF (PPA).

Quick Comparison: What Sets These Military ETFs Apart

Each of these defense-focused ETFs comes with its own strategic approach. XAR invests in 33 aerospace and defense stocks from the S&P 500 with a lean expense ratio of 0.35%. ITA casts a slightly wider net with 36 holdings but concentrates 76.6% of assets in its top 10, making it less balanced overall. PPA, meanwhile, holds 54 defense and homeland security companies across a broader SPADE Defense Index.

On the surface, all three earn Outperform-equivalent Smart Scores of 8 out of 10, and all three have received Moderate Buy ratings from Wall Street analysts. But beneath these similarities lie critical differences in performance, diversification, and cost-efficiency that could significantly impact your returns.

The Performance Reality Check

Here’s where strategy matters. Over the past three years (as of July 31), PPA has delivered a 14.3% annualized return—substantially higher than XAR’s 6.3% and ITA’s 7.4%. This gap widens when you factor in the broader market: the Vanguard S&P 500 ETF (VOO) posted 9.5% over the same period, meaning both XAR and ITA lagged the general market while PPA surged ahead.

Looking at the five-year window, PPA generated 11.6% annualized returns versus XAR’s 8.6% and ITA’s disappointing 5.4%. Over a full decade, PPA’s 14.6% annualized return beat even the S&P 500’s 13.1%, while XAR matched the market at 13.3% and ITA trailed at 10.6%.

The data tells a story: if you’re seeking to capture the military ETF trend, raw performance separates the winners from the middle-of-the-pack options.

Understanding the Holdings: Quality vs. Concentration

XAR’s portfolio features impressive quality indicators—seven of its top 10 holdings carry Outperform-equivalent Smart Scores of 8+, including four with perfect 10 scores: Howmet Aerospace (HWM), Lockheed Martin (LMT), and HEICO (HEI), which counts Warren Buffett among its recent investors. Its reasonable 49.7% concentration in the top 10 suggests healthy diversification.

ITA boasts similar quality metrics with seven top-10 holdings rated 8+, but here’s the catch: its 76.6% concentration in the top 10 creates significant risk. More problematic is its weighting in Boeing (BA) at 9.3%—a company that has faced persistent operational challenges and has become a portfolio drag. This single position could weigh on returns for the foreseeable future.

PPA takes a different route with six Outperform-rated stocks in its top 10 but spreads exposure across 54 holdings total, creating superior diversification. This broader approach reduces single-stock risk while maintaining quality exposure to the defense and aerospace sector.

The Cost of Entry: Expense Ratios Matter

XAR and ITA both charge 0.35% annually—meaning $35 per $10,000 invested per year. PPA’s 0.65% expense ratio is twice as high ($65 per $10,000), which initially appears less attractive. However, this higher fee must be evaluated against PPA’s demonstrated outperformance. When an ETF consistently beats peers by 6-7% annually, the extra 0.30% in costs becomes trivial.

Wall Street’s Verdict

Analyst consensus supports all three with Moderate Buy ratings, though the details vary. XAR averages a $167.29 price target implying 8.33% upside. ITA targets $157.67 for 7.5% upside. PPA’s $120.47 target suggests 6.9% upside potential. Notably, PPA received 45 Buy ratings versus 25 for XAR and 28 for ITA—a signal that Wall Street increasingly favors the strongest performer.

Which Military ETF Wins?

The evidence points decisively toward PPA. Yes, it costs more to own. But outperformance of 6-8 percentage points annually versus competitors, combined with beating the broader market over the past decade, justifies the premium. Its broader diversification across 54 holdings reduces idiosyncratic risk compared to ITA’s concentrated exposure. And its consistent Smart Score rating of 8 reflects genuine portfolio quality.

For investors seeking credible exposure to the defense and aerospace sector amid ongoing geopolitical uncertainty, PPA represents the most compelling choice. The higher expense ratio is less a cost than a small price for demonstrably superior execution and long-term returns. In a world where geopolitical risk remains elevated, this military ETF delivers both conviction and results.