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It’s an increasingly dangerous world from a geopolitical perspective, with conflict flaring in the Middle East, the war between Ukraine and Russia raging on, and tensions between the U.S. and China surrounding Taiwan. This geopolitical instability, however, creates a prime opportunity for the defense sector, as countries worldwide ramp up military spending to defend themselves and stay prepared for worst-case scenarios.
Given this context, several prominent ETFs are focused on the defense industry, including the SPDR S&P Aerospace & Defense ETF (XAR), the iShares U.S. Aerospace & Defense ETF (ITA), and the Invesco Aerospace & Defense ETF (PPA).
These three defense-focused ETFs feature Outperform-equivalent TipRanks Smart Scores, but which one offers the best option for investors seeking exposure to the defense sector? Read on to find out.
SPDR S&P Aerospace & Defense ETF
XAR is part of the popular Sector SPDR series of ETFs and invests in the aerospace and defense sector of the S&P 500 (SPX).
As such, the $2.3 billion ETF invests in 33 stocks, and its top 10 holdings make up a reasonable 49.7% of the fund’s assets.
Below, you’ll find an overview of XAR’s top 10 holdings from TipRanks’ holdings tool.
You’ll notice that XAR’s top 10 holdings boast a fairly impressive collection of Smart Scores.
The Smart Score is a quantitative stock scoring system created by TipRanks. It gives stocks a score from one to 10, based on eight key market factors. Scores of 8, 9, or 10 are considered equivalent to an Outperform rating. The score is data-driven and does not involve any human intervention.
Seven of XAR’s top 10 holdings feature Outperform-equivalent Smart Scores of 8 or higher, including four with perfect 10 Smart Scores – Howmet Aerospace (HWM), Lockheed Martin (LMT), and one of Warren Buffett’s newest holdings, HEICO (HEI).
XAR itself features an Outperform-equivalent ETF Smart Score of 8 out of 10.
XAR features a fairly reasonable expense ratio of 0.35%, meaning an investor in the fund will pay $35 in fees on a $10,000 investment annually.
In terms of performance, as of July 31, XAR has generated an annualized performance of 6.3% over the past three years, 8.1% over the past five years, and 13.3% over the past decade. We’ll discuss this performance in comparison to its competitors and the broader market later in this article.
Is XAR Stock a Buy?
Turning to Wall Street, XAR earns a Moderate Buy consensus rating based on 25 Buys, nine Holds, and zero Sell ratings assigned in the past three months. The average XAR stock price target of $167.29 implies 8.33% upside potential from current levels.
XAR has many attractive features, such as its portfolio of highly-rated defense stocks with strong Smart Scores. But overall, I’m neutral on XAR due to its relatively mediocre total returns compared to its competitors, which we’ll explore further.
iShares U.S. Aerospace & Defense ETF
ITA is BlackRock’s (BLK) iShares offering in the space. According to iShares, ITA “seeks to track the investment results of an index composed of U.S. equities in the aerospace and defense sector.”
ITA owns 36 stocks and its top 10 holdings make up a relatively high 76.6% of assets, making ITA less diversified and more concentrated than its peers discussed in this article.
Below, you’ll find an overview of ITA’s top 10 holdings using TipRanks’ holdings tool.
ITA owns many of the same stocks as XAR, and like XAR, seven of its top 10 holdings feature Outperform-equivalent Smart Scores of 8 or above.
ITA itself features an Outperform-equivalent ETF Smart Score of 8 out of 10.
One thing I don’t like about ITA is that it has a fairly large position in Boeing (BA) (with a weighting of 9.3%), which has faced many serious challenges in recent years and has dragged down the fund’s overall performance in recent times. This large position in Boeing gives me caution about investing in ITA going forward.
In terms of performance, as of July 31, ITA has posted a three-year annualized return of 7.4%, a five-year annualized return of 5.4%, and a 10-year annualized return of 10.6%, which we’ll break down further later in this article.
Is ITA Stock a Buy?
Turning to Wall Street, ITA earns a Moderate Buy consensus rating based on 28 Buys, nine Holds, and zero Sell ratings assigned in the past three months. The average ITA stock price target of $157.67 implies 7.5% upside potential from current levels.
I have a Neutral view on ITA. While its portfolio contains many highly-rated defense stocks, its returns have been fairly underwhelming. Additionally, it is less diversified compared to its competitors and has a substantial position in Boeing, which I believe will encounter significant challenges for the foreseeable future.
Invesco Aerospace & Defense ETF
According to the ETF’s sponsor, Invesco, PPA invests in an index known as the SPADE Defense Index. It “will normally invest at least 90% of its total assets in common stocks that comprise the Index. The Index is designed to identify a group of companies involved in the development, manufacturing, operations, and support of US defense, homeland security, and aerospace operations.”
PPA invests in a broad basket of these defense, homeland security, and aerospace stocks.
The fund owns 54 stocks, and its top 10 holdings account for 53.6% of assets.
Below, you’ll find an overview of PPA’s top 10 holdings using TipRanks’ holdings tool.
Like its competitors, PPA’s portfolio contains many defense stocks with Outperform-equivalent Smart Scores. PPA holds six of these within its top 10, compared to seven for XAR and ITA.
PPA itself features an Outperform-equivalent ETF Smart Score of 8.
PPA sets itself apart from the pack here with its strong performance in recent years and over the past decade.
As of July 31, the fund has achieved an impressive three-year annualized return of 14.3%. This significantly outperforms the broader market, with the Vanguard S&P 500 ETF (VOO) delivering an annualized return of 9.5% over the same period. It also surpasses its previously mentioned competitors, with XAR producing an annualized return of 6.3% and ITA returning 7.4% over the past three years (as of July 31).
PPA has also outperformed its peers over the past five years, generating a respectable annualized total return of 11.6% (as of July 31). In comparison, XAR returned an annualized 8.6%, and ITA yielded just 5.4%. However, it’s important to note that all three ETFs lagged behind the broader market, with the Vanguard S&P 500 ETF achieving a robust annualized return of 15.0% during the same period.
Similarly, over the past 10 years, PPA has delivered an impressive total annualized return of 14.6% (as of July 31), outperforming the broader market, with VOO posting a 13.1% return, XAR at 13.3%, and ITA at 10.6% over the same period. However, PPA’s expense ratio is 0.65%, which is relatively high. This means that PPA charges $65 in fees on a $10,000 investment annually, a rate higher than those typically seen in broad market index funds and higher than the 0.35% fees charged by both XAR and ITA.
Nevertheless, given PPA’s strong performance in recent years, it seems that PPA’s higher expense ratio could be a price worth paying for the time being.
Below, you can check out a comparison of XAR, ITA, and PPA using TipRanks’ ETF Comparison Tool, which allows investors to compare up to 20 ETFs at a time based on a variety of factors.
I’m bullish on PPA due to its strong portfolio of highly-rated defense stocks, impressive performance that has consistently outpaced its competitors and the broader market, and favorable ratings from TipRanks’ Smart Score system.
Is PPA Stock a Buy?
Turning to Wall Street, PPA earns a Moderate Buy consensus rating based on 45 Buys, 10 Holds, and zero Sell ratings assigned in the past three months. The average PPA stock price target of $120.47 implies 6.9% upside potential from current levels.
A Clear Winner
At the end of the day, PPA is the clear winner amongst defense ETFs. While it is more expensive than ITA and XAR, it justifies this higher cost by outperforming them over the past three, five, and 10 years. I also like the fact that it has beaten the broader market over the past 10 years.
It’s difficult to argue that the world is growing safer or more stable, and this unpredictability makes defense an attractive area to invest in. I’m bullish on PPA, viewing it as the most attractive and effective way to gain exposure to this sector.
Disclosure