Finding the Best Defense ETF? Why XAR Stands Out in Aerospace & Defense Investing

The aerospace and defense sector has emerged as one of the most compelling investment categories for those seeking both growth and stability. The SPDR S&P Aerospace & Defense ETF (NYSEARCA: XAR), a $2.1 billion fund managed by State Street, represents a best defense etf choice for investors navigating an environment where global geopolitical risks are reshaping capital allocation priorities. With top holdings that are reporting record demand and expanding order backlogs, XAR merits serious consideration for defensive-minded portfolios.

Why Geopolitical Tensions Are Creating Investment Opportunities

The investment landscape has shifted dramatically in recent years. According to data from the Uppsala Conflict Data Program, the number of armed conflicts worldwide has risen sharply—from fewer than 100 in 2010 to nearly 200 today. While this represents a troubling global situation, it has tangible economic consequences for defense contractors and the funds that hold them.

This escalation in international tensions has triggered a wave of defense spending across multiple nations. Countries are substantially increasing their budgets for military equipment, unmanned systems, and aerospace technologies, creating sustained demand for the companies held within XAR. Unlike consumer-oriented stocks, defense contractors benefit from multi-year government contracts with reliable, creditworthy customers. This structural advantage makes defense equities appealing for risk-conscious investors.

Beyond stable cash flows, defense stocks demonstrate genuine defensive characteristics during periods of market stress triggered by geopolitical uncertainty. When global tensions rise and other equity sectors struggle, aerospace and defense holdings often maintain or appreciate in value due to their counter-cyclical nature.

Understanding XAR’s Investment Strategy and Portfolio Construction

According to State Street, XAR “seeks to provide investment results that correspond generally to the total return performance of the S&P Aerospace & Defense Select Industry Index.” This benchmark approach gives investors broad exposure to the aerospace and defense segment within the S&P Total Market Index.

A key feature of XAR is its focused yet diversified portfolio. The fund holds just 35 stocks, with the top 10 positions representing approximately 45.1% of assets. This concentration in quality holdings is neither excessive nor unduly narrow, striking a balance between focus and diversification.

Notably, XAR maintains only a 2.9% weighting in Boeing (NYSE: BA), making it less vulnerable to that company’s well-documented operational challenges. This compares favorably to competing aerospace and defense ETFs, where Boeing weightings can exceed 14%.

Core Holdings Demonstrating Exceptional Performance

The quality of XAR’s top holdings becomes apparent when examining recent corporate results. AeroVironment (NASDAQ: AVAV), one of the fund’s largest positions, exemplifies the strong fundamentals driving the best defense etf opportunities today.

AeroVironment recently reported exceptional quarterly earnings, with third-quarter revenue reaching $187 million—a nearly 40% year-over-year increase. The company’s Loitering Munitions segment, which manufactures the Switchblade drone system, posted record quarterly revenue with more than double the year-ago sales. CEO Wahid Nawabi attributed this surge to “high demand across the globe,” with over 20 countries seeking to acquire the Switchblade platform.

The company’s adjusted earnings per share reached $0.63, significantly exceeding analyst expectations of $0.33. AeroVironment swung from a loss in the prior year to net income of $13.9 million. Management raised full-year guidance based on what Nawabi described as “record demand and strong operating execution,” with revenue expected to grow at double-digit rates in the subsequent fiscal year. The company’s order backlog expanded 12% year-over-year, demonstrating the durability of demand.

AeroVironment earned a Smart Score of 8 out of 10 from TipRanks, signaling an “Outperform” rating. Importantly, these exceptional results at a major XAR holding likely indicate favorable conditions throughout the aerospace and defense sector.

Other significant XAR positions also demonstrate strong momentum. Textron (NYSE: TXT) raised its full-year earnings guidance to $6.20-6.40 per share, surpassing Wall Street consensus estimates of $5.96. The company’s growing backlog reached $7.2 billion, representing over 10% growth. Textron carries a perfect Smart Score of 10.

Howmet Aerospace (NYSE: HWM), an engineered solutions provider serving aerospace and transportation sectors, posted full-year revenue growth of 17% and adjusted earnings per share growth of 31%. The company has achieved 10 consecutive quarters of growth across revenue, adjusted EBITDA, and adjusted earnings per share metrics. Howmet also carries a 9 out of 10 Smart Score.

Raytheon Technologies (NYSE: RTX) rounds out the top-tier holdings with a perfect Smart Score of 10, reflecting consistent analyst confidence in the company’s outlook.

Fee Structure: Competitive Advantage in the ETF Landscape

When selecting among aerospace and defense funds, expense ratios merit careful attention. XAR’s 0.35% expense ratio is competitive within the category and notably lower than its primary competitors.

The iShares U.S. Aerospace & Defense ETF (BATS: ITA) charges 0.40%, while the Invesco Aerospace & Defense ETF (NYSEARCA: PPA) charges 0.58%. Over a 10-year investment horizon with assumed 5% annual returns, these seemingly modest fee differences compound significantly. An investor placing $10,000 into XAR would pay approximately $443 in cumulative fees over the decade, compared to $505 in ITA or $726 in PPA. This cost advantage reinforces XAR’s positioning as a best defense etf for cost-conscious investors.

Historical Performance and Long-Term Track Record

XAR’s recent three-year annualized return of 5.3% may appear modest relative to broader equity market performance during certain periods. However, examining longer time horizons reveals a more compelling narrative. The fund has delivered:

• 8.2% annualized return over five years
• 11.4% annualized return over the past decade
• 16.1% annualized return since its 2011 inception

This extended track record suggests that aerospace and defense holdings have provided meaningful returns over market cycles, with the defensive characteristics helping stabilize performance during downturns.

What Wall Street Analysts Say About XAR

Turning to professional analyst opinion, XAR carries a Moderate Buy consensus rating based on submissions from the past three months. The distribution reflects 24 Buy ratings, 11 Hold ratings, and one Sell rating. The average analyst price target of $163.18 implies approximately 17.7% upside potential from prevailing prices, suggesting meaningful return opportunity according to consensus opinion.

Final Assessment: Is XAR the Right Fit?

For investors seeking a best defense etf with exposure to aerospace and defense contractors, XAR presents a compelling case. The fund combines reasonable expense ratios, portfolio quality, reasonable weightings to troubled peers, and exposure to companies enjoying robust demand environments.

With global geopolitical risks elevated, defense spending likely to remain elevated, and core holdings reporting record financial performance alongside expanding backlogs, XAR offers both the defensive characteristics sought by risk-conscious investors and the growth potential driven by genuine industry tailwinds. The fund’s extended history of positive returns across multiple market cycles further supports its consideration as a core defensive holding.