Best Aerospace & Defense ETFs

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Hello! Today, I've brought you a topic that's not just timely but increasingly crucial for investors navigating our complex world: The Best Aerospace and Defense ETFs to Buy!

In a world where global tensions are unfortunately high – from ongoing conflicts to renewed defense commitments by major alliances like NATO – the aerospace and defense sector is experiencing significant tailwinds. Governments around the globe are taking notice, and so should your investment portfolio!

But what exactly goes into these funds, and how do you pick the right ones? Don't worry, I've done the heavy lifting for you. Let's dive in!

☆ Why Aerospace & Defense ETFs Are Taking Flight Now

The geopolitical landscape in 2025 is certainly one for the history books. We've seen protracted conflicts, regional tensions escalating, and a global re-evaluation of national security. Remember that NATO summit in The Hague? Member nations agreed to significantly boost defense spending targets, pushing from the traditional 2% of GDP all the way to 5%! That's a massive shift!

This isn't just about reacting to current events; it's about a long-term strategic pivot by nations. Some investors are using these ETFs as a smart way to hedge against geopolitical instability, while others see them as a direct path to capitalize on this surge in global military spending. It's a powerful combination driving substantial inflows into these funds.

But here's the kicker: not all aerospace and defense ETFs are created equal. Understanding how each fund selects and weights its holdings is absolutely critical, as these choices can lead to wildly different performance outcomes. That's why we're going to break it down.

☆ Diving Deep: What's Inside an Aerospace and Defense ETF?

When you hear "aerospace and defense," you might immediately picture fighter jets and missiles. And yes, those are definitely represented! But these ETFs hold a surprisingly diverse array of companies. It's a complex ecosystem of manufacturers, suppliers, service providers, and contractors all supporting defense and aerospace operations.

Let's look at the different layers:

  • The "Heavy Hitters": Major Prime Contractors
    These are the giants that build complete weapons systems and platforms. Think of them as the orchestrators of modern warfare technology. The "Big 5" in the U.S. include:

    • Lockheed Martin (LMT): Known for the formidable F-35 fighter jet, Black Hawk helicopters, and the highly effective HIMARS rocket systems.
    • RTX (RTX): Formerly Raytheon, they produce iconic systems like the Patriot missile defense system and the Tomahawk cruise missile.
    • Northrop Grumman (NOC): Responsible for the cutting-edge B-21 Raider stealth bomber and various advanced missile defense systems.
    • Boeing (BA): A key supplier of military aircraft such as the F/A-18 Super Hornet and the AH-64 Apache attack helicopter.
    • General Dynamics (GD): Builders of heavy-duty equipment like Abrams tanks, Stryker armored vehicles, and Virginia-class nuclear submarines.
      These companies dominate procurement and are often the backbone of many defense ETFs.

  • The Specialized Component Makers
    Beyond the full systems, many firms play a crucial role by supplying key components. They might not be household names, but they are indispensable!

    • GE Aerospace (GE): Primarily focuses on manufacturing jet engines for both military and commercial aircraft.
    • L3Harris Technologies (LHX): Specializes in defense electronics, advanced communications systems, and space sensors.
    • TransDigm Group (TDG): Provides highly engineered aircraft components such as actuators, ignition systems, and cockpit controls used across both military and commercial platforms.

  • Beyond Pure Plays: Industrial Conglomerates
    Some major players aren't exclusively defense-focused but have significant defense operations.

    • Honeywell International (HON): While a broad industrial conglomerate, it's a major provider of avionics, navigation, and surveillance systems to the military.

  • The European Front: Re-Armament in Action
    Europe is undergoing a significant rearmament push, bringing many regional contractors into the investor spotlight.

    • Rheinmetall (Germany): A powerhouse in tanks, artillery, and ammunition systems.
    • Leonardo (Italy): Supplies helicopters, aircraft, and electronics.
    • Saab (Sweden): Producer of the Gripen fighter jet and advanced radar systems.
    • Dassault Aviation (France): Builder of the Rafale multirole combat aircraft.
    • BAE Systems (U.K.): Offers a wide portfolio spanning land, sea, air, and even cyber defense.

  • The Digital Battlefield: Cybersecurity & Intelligence
    Modern defense isn't just about hardware. The digital realm is increasingly vital.

    • Booz Allen Hamilton (BAH): Provides critical consulting and technology solutions to the Pentagon and various intelligence agencies.
    • Palantir Technologies (PLTR): Develops powerful data analytics platforms used for military intelligence, targeting, and situational awareness.

As you can see, the definition of "defense" in these ETFs can span a wide range, from physical weapons to the digital backbone of national security. That's why carefully examining each fund's holdings is so important!

☆ How We Picked the Best of the Best

To ensure we're recommending funds that are not just effective but also sensible for long-term investors, we applied some strict criteria:

  1. No Leveraged or Inverse ETFs: These are for short-term traders, not long-term wealth builders. We stuck to "long-only" funds providing unleveraged exposure.
  2. Cost-Efficiency: Expense ratios were capped at a reasonable 0.60%. Every dollar saved in fees is a dollar that stays in your pocket!
  3. Liquidity: We required a 30-day median bid-ask spread below 0.25% to ensure easy and efficient trading.
  4. Size and Stability: A minimum of $500 million in Assets Under Management (AUM) was a must. This reduces the risk of fund closure and indicates substantial investor interest and scale.

These screens helped us identify funds that are reasonably priced, highly liquid, and built to last, perfectly aligning with the long-term trends driving defense and aerospace spending.

☆ Our Top Aerospace & Defense ETF Picks!

Let's get to the stars of the show – the ETFs that meet our rigorous standards and offer compelling exposure to this vital sector!

1. iShares U.S. Aerospace & Defense ETF (ITA)

  • Assets Under Management: $8.3 billion
  • Expense Ratio: 0.40%
  • 30-Day Median Bid-Ask Spread: 0.03%

ITA is often considered the benchmark in this category, and for good reason! Launched back in May 2006, it boasts one of the longest track records. It follows the Dow Jones U.S. Select Aerospace & Defense Index and holds a concentrated portfolio of 38 domestic companies. However, keep in mind it's market cap-weighted, meaning larger companies like GE Aerospace (20.7%), RTX (14.7%), and Boeing (8.8%) command significant portions of the portfolio. This can lead to notable imbalances.

2. Invesco Aerospace & Defense ETF (PPA)

  • Assets Under Management: $5.7 billion
  • Expense Ratio: 0.57%
  • 30-Day Median Bid-Ask Spread: 0.05%

The Invesco Aerospace & Defense ETF, PPA, tracks the SPADE Defense Index, a unique benchmark developed by a defense-focused analyst firm. Launched in October 2005, it slightly edges out ITA in terms of track record. PPA uses a modified market-cap weighting approach, which helps limit overexposure to diversified firms where defense might be just one segment of their business. While it shares many holdings with ITA, it's notably less top-heavy, offering a more balanced portfolio.

3. SPDR S&P Aerospace & Defense ETF (XAR)

  • Assets Under Management: $3.6 billion
  • Expense Ratio: 0.35%
  • 30-Day Median Bid-Ask Spread: 0.06%

XAR stands out by tracking the S&P Aerospace & Defense Select Industry Index with an equal-weight methodology. This is a key differentiator! Instead of being weighted by market cap, each of its 36 holdings gets roughly the same allocation, regardless of size. This significantly reduces concentration risk and prevents the biggest contractors from dominating the portfolio. It also provides greater exposure to mid- and small-cap stocks, particularly in the aerospace segment.

4. Global X Defense Tech ETF (SHLD)

  • Assets Under Management: $3.0 billion
  • Expense Ratio: 0.50%
  • 30-Day Median Bid-Ask Spread: 0.05%

SHLD is a relative newcomer, having launched in September 2023, but it has rapidly gained traction with impressive returns. It tracks the proprietary Global X Defense Tech Index, taking a broader and more modern approach. Unlike traditional aerospace-heavy ETFs, SHLD leans more into military hardware and cutting-edge defense technology. While it includes familiar names like Lockheed Martin and General Dynamics, it expands its reach to European defense firms (Leonardo, Rheinmetall, Thales) and has a strong focus on intelligence, with Palantir Technologies as a top holding. This fund offers a forward-looking perspective on defense.

5. Select STOXX Europe Aerospace & Defense ETF (EUAD)

  • Assets Under Management: $1.0 billion
  • Expense Ratio: 0.50%
  • 30-Day Median Bid-Ask Spread: 0.10%

For investors seeking international diversification in the defense sector, EUAD is an excellent choice. It offers an internationally focused alternative to U.S.-centric funds. EUAD tracks the STOXX Europe Total Market Aerospace & Defense Index and exclusively includes European-listed companies or American Depositary Receipts (ADRs) that generate at least 50% of their revenue from aerospace and defense. Its holdings include European heavyweights like Airbus, Rheinmetall, BAE Systems, Thales, Leonardo, and even Rolls-Royce (yes, the famous car company also makes major aircraft engines!). This fund has seen tremendous interest and strong performance amid Europe's rearmament efforts.

☆ Questions

Q1. Why should I consider investing in Aerospace & Defense ETFs now, given the current global climate?
A. The current global climate, marked by ongoing conflicts and increased defense spending targets from major alliances like NATO, creates strong tailwinds for the aerospace and defense sector. Investing in these ETFs can serve as both a hedge against geopolitical instability and a way to capitalize on the significant increase in global military budgets. It's a direct way to align your portfolio with macro trends influencing global security.

Q2. Are there any risks associated with investing in these ETFs?
A. Absolutely, like any investment, A&D ETFs carry risks. While current trends are favorable, the sector is heavily reliant on government contracts and political decisions, which can be unpredictable. Budget cuts, shifts in foreign policy, or a de-escalation of global tensions could impact performance. Additionally, some funds might be concentrated in a few large companies or specific sub-sectors, leading to concentration risk. Always do your due diligence and consider your overall portfolio diversification.

☆ Conclusion

The aerospace and defense sector is in a unique position, driven by undeniable geopolitical realities and a renewed commitment to national security worldwide. Whether you're looking for U.S.-focused exposure, a technology-centric approach, or a pure play on European rearmament, the ETFs we've discussed offer excellent avenues to participate in this powerful trend.

Remember, the key is to choose the fund that best aligns with your investment goals and risk tolerance, paying close attention to its specific holdings and weighting methodology. Happy investing!