Uncertainty over North Korea and the U.S. government's military spending keeps defense stocks interesting. The Standard and Poor's (S&P) Aerospace & Defense Select Industry Index is down -6.51% year to date as of Nov 18, 2022. This compares with a negative return of -17.20% for the S&P 500 Index over the same period.
Investors who want exposure to the defense sector in the continuing period of U.S./North Korean geopolitical uncertainty and defense spending should consider adding one of these three exchange-traded funds (ETFs) to their portfolio.
- The SPDR S&P Aerospace & Defense ETF (XAR) tracks the S&P Aerospace & Defense Select Industry Index and has a YTD return of -8.50%.
- The iShares U.S. Aerospace & Defense ETF (ITA) tracks the Dow Jones U.S. Select Aerospace & Defense Index and has a three-year YTD return of -5.61%.
- The Invesco Aerospace & Defense ETF (PPA) tracks the SPADE Defense Index. It has a YTD return of -6.81%.
The SPDR S&P Aerospace & Defense ETF launched in 2011 and seeks to replicate the returns of the S&P Aerospace & Defense Select Industry Index. The fund does this by investing the majority of its assets in securities that make up the benchmark index, such as stocks in the aerospace and defense sectors. The fund's top five holdings account for 20.76% of its portfolio. These holdings are Axon Enterprise (AXON), Curtiss-Wright Corporation (CW), Lockheed Martin (LMT), Aerojet Rocketdyne Holdings (AJRD), and Boeing (BA).
The SPDR S&P Aerospace & Defense ETF has assets under management (AUM) of $1.328 billion. It has a low expense ratio of 0.35%, which compares with the category average of 0.46%. As of Nov. 18, the fund has a year-to-date (YTD) return of -8.50%, but it has also performed well over the longer term, with a five-year annualized return of 6.32%.
Created in 2006, the iShares U.S. Aerospace & Defense ETF aims to match the returns of the Dow Jones U.S. Select Aerospace & Defense Index. It attempts to achieve this by investing a minimum of 80% of its AUM in securities that comprise the underlying index.
These are securities of companies that manufacture, assemble and distribute aircraft and aircraft parts. The Boeing Company (BA) has a weighting of 8.86%. Other key holdings include Raytheon Technologies (RTX) at 20.69% and Lockheed Martin Corporation (LMT) at 16.54%.
The iShares U.S. Aerospace & Defense ETF is the largest defense fund in its category, with $4.27 billion in net assets. The fund’s three- and five-year annualized returns are -5.61% and 1.63%, respectively. The ETF was trading at $108.90 on Nov. 18, 2022, the top-end of its 52-week trading range of $102 and $113.67. ITA has a dividend yield of 0.9% and an expense ratio of 0.39%.
The Invesco Aerospace & Defense ETF was formed in 2005 and attempts to provide similar returns to the SPADE Defense Index. To do this, the fund invests in constituents of the benchmark index. These are companies that develop, manufacture, operate and support defense, military, and aerospace operations. PPA has 56 stocks in its portfolio. The ETF's top three holdings of Lockheed Martin, Boeing (BA), and Raytheon Technologies have a cumulative weighting of 21.40%.
The Invesco Aerospace & Defense ETF is the most expensive of the three funds discussed, with an expense ratio of 0.58%. It is similar in size to XAR, with AUM of $1.7 billion. This average-rated-risk fund has a five-year annualized return of 3.14%, a three-year annualized return of -4.06%, and a YTD return of -6.81% as of Nov. 18, 2022.
What Is the Best Defense ETF?
If rated by year-to-date returns, the best-performing defense ETF is Invesco Aerospace & Defense ETF (PPA), followed by iShares U.S. Aerospace & Defense ETF (ITA).
Is There a Defense Sector ETF?
There are seven defense sector ETFs to choose from—Invesco Aerospace & Defense ETF (PPA), iShares U.S. Aerospace & Defense ETF (ITA), Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN), SPDR S&P Aerospace & Defense ETF (XAR), SPDR S&P Kensho Future Security ETF (FITE), and ARK Space Exploration & Innovation ETF (ARKX), and First Trust Indxx Aerospace & Defense ETF (MISL).
Does Vanguard Have a Defense ETF?
Vanguard does not have a defense ETF as of November 2022.
What ETF has Lockheed Martin?
All six defense ETFs include Lockheed Martin. Hundreds of other ETFs hold Lockheed Martin, including Schwab US Dividend Equity ETF (SCHD), Vanguard Industrials ETF (VIS), iShares Global Industrials ETF (EXI), and Invesco S&P 100 Equal Weight ETF (EQWL).