The Iran war has added a wild card to the U.S. economic growth narrative. Oil prices and inflation have both moved significantly higher and threaten to slow the global economy in the second half of this year.
The uncertainty, however, has created opportunities in certain sectors that tend to outperform in these geopolitical environments. The defense sector is one of those. The anticipation for higher demand in aircraft, missiles, and cybersecurity often sends share prices at least temporarily higher, and that's what we've seen over the past year.
Two of the biggest exchange-traded funds (ETFs) in this space -- the iShares U.S. Aerospace & Defense ETF (ITA 0.06%) and the State Street SPDR S&P Aerospace & Defense ETF (NYSEMKT: XAR) -- present two very different ways to invest in the industry. Just because they share a similar name doesn't mean the portfolios are anything alike.
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The case for aerospace and defense stocks right now
The biggest longer-term catalyst for this sector is usually global defense spending. The current environment is no different. In 2025, the Defense Department budget request was roughly $850 billion. In 2026, that number jumped to more than $960 billion. The administration's current protectionist policies and tensions with global allies suggest that defense will remain a budgetary priority for the foreseeable future.
At the 2025 NATO summit, allied nations agreed to an annual defense spending requirement of 5% of their gross domestic product (GDP). Previous guidelines called for nations to spend 2% of GDP on defense, but this increase of 3 percentage points should ensure a huge level of capital investment into the sector for years to come.
Why the State Street ETF deserves a closer look
While both ETFs target roughly the same companies in this sector, the portfolio weightings are the big differentiator.
| Metric | State Street | iShares |
|---|---|---|
| Expense ratio | 0.35% | 0.38% |
| Assets under management | $5.8 billion | $13.3 billion |
| One-year return | 40% | 28% |
| Holdings | 41 | 44 |
| Weighting methodology | Equal | Market cap |
| Largest holdings | Rocket Lab (5.6%) Hexcel (3.4%) BWX Technologies (3.4%) | GE Aerospace (19%) RTX (14.8%) Boeing (10%) |
Sources: State Street, iShares.
The iShares U.S. Aerospace & Defense ETF is market-cap-weighted, which results in nearly half of the portfolio being concentrated in just three companies: GE Aerospace, RTX, and Boeing. If you want to limit your exposure to just the industry's biggest names, this would be the way to do it. But that makes the fund extremely vulnerable to downside risk should anything happen to one of these three companies.
The State Street SPDR S&P Aerospace & Defense ETF, on the other hand, is equal-weighted and invests in the theme rather than just a few companies within it. There's still a bit of top-heaviness, but exposures are much more spread out. In my opinion, this is the better way to invest in this sector.
The aerospace and defense space is one that will remain in the spotlight and see a lot of money invested in it over the next decade. That makes it an attractive pick for the short and long term, but be careful not to overconcentrate in just a few names. Buy the whole story instead.
