For the foreseeable future, there is going to be demand for defense companies and the products they make.
Defense stocks tend not to be as glamorous as high-growth sectors like tech, but they provide reliable revenue and income from a customer -- the U.S. government -- with a seemingly insatiable appetite for its products. Defense stocks tend to be stable contributors to an income-focused portfolio, with predictable long-term revenue streams that translate into solid dividends and healthy returns for investors.
But no one defense contractor makes everything, and one would have to buy all of the largest defense companies to gain full exposure to a sector. With that in mind, it might make more sense to invest in defense through an exchange-traded fund (ETF) that gives you a small interest in a large number of companies with ties to the aerospace and defense market.
Six best defense ETFs
Six best defense ETFs to consider in 2024
Here is a list of some of the top defense-focused ETFs:
1. iShares U.S. Aerospace and Defense ETF
iShares U.S. Aerospace & Defense ETF
The iShares U.S. Aerospace & Defense ETF (ITA 0.4%) is the largest ETF focused on defense, with $5.05 billion in net assets as of October 2023. The ETF is designed to provide exposure to domestic United States aerospace and defense companies, as well as exposure to the commercial aerospace industry.
As of October 2023, the top five holdings in the iShares U.S. Aerospace & Defense ETF were:
- RTX (RTX -0.29%)
- Boeing (BA 0.25%)
- Lockheed Martin (LMT -0.75%)
- Northrop Grumman (NOC -1.56%)
- General Dynamics (GD -0.17%)
The top five holdings represent just over 50% of total assets in a portfolio that includes 39 stocks. iShares U.S. Aerospace & Defense has a 0.40% expense ratio.
2. Invesco Aerospace and Defense ETF
2. Invesco Aerospace & Defense ETF
The Invesco Aerospace & Defense ETF (PPA 0.56%) is based on the SPADE Defense Index, which is designed to identify companies involved in the development, manufacturing, operations, and support of the U.S. defense, homeland security, and aerospace sectors. The ETF has about $2.074 billion in assets.
As of early May 2023, the top five holdings in the Invesco Aerospace & Defense ETF were:
- Northrop Grumman
- RTX
- Lockheed Martin
- Boeing
- General Electric (GE 0.68%)
The ETF has 53 total holdings. The top five holdings represent about 31.9% of the total portfolio. The Invesco Aerospace & Defense ETF has a 0.58% expense ratio.
3. SPDR S&P Aerospace and Defense ETF
3. SPDR S&P Aerospace & Defense ETF
SPDR S&P Aerospace & Defense ETF (XAR 1.12%) has $1.58 billion in assets under management and invests in the stocks that make up the S&P Aerospace & Defense Select Industry Index. The index attempts to broaden exposure past the so-called "prime" contractors that dominate the top end of the defense market, blending in a mix of mid-cap and small-cap industry exposure as well.
As of October 2023, the top five holdings in the SPDR S&P Aerospace & Defense ETF were:
- Spirit AeroSystems (SPR 2.14%)
- Northrop Grumman
- General Dynamics
- BWX Technologies (BWXT 1.37%)
- Lockheed Martin
The top five holdings represent about 22.93% of total assets in the portfolio. The SPDR Aerospace & Defense ETF has a 0.35% expense ratio.
4. ARK Space Exploration and Innovation ETF
4. ARK Space Exploration & Innovation ETF
The ARK Space Exploration & Innovation ETF (ARKX 3.13%) is an aerospace-focused actively managed fund run by Cathie Wood's Ark Invest. As with most of Ark's portfolio, this ETF is focused primarily on growth. In this case, that means the ARK Space Exploration ETF has a lot of its assets in space-focused companies, as well as enabling technologies companies and others who support aerospace missions. The fund has about $261.5 million in assets under management.
As of October 2023, the top five holdings in the ARK Space Exploration & Innovation ETF were:
- AeroVironment (AVAV 1.57%)
- Trimble (TRMB 1.59%)
- Kratos Defense & Security Solutions (KTOS 9.12%)
- Iridium Communications (IRDM 5.66%)
- L3Harris Technologies (LHX 3.46%)
The top five holdings represent about 37% of the total portfolio. ARK Space Exploration & Innovation ETF has a 0.75% expense ratio.
5. Direxion Daily Aerospace and Defense Bull 3X Shares
5. Direxion Daily Aerospace & Defense Bull 3X Shares
The Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN 1.18%) is intended to generate a 300% return compared to its benchmark index, the Dow Jones U.S. Select Aerospace & Defense Index, every day. The fund does that using leverage, and investors should be aware that, along with the potential for added reward, leveraged ETFs come with a lot more risks than standard ETFs. Direxion states on its website that its leveraged ETFs are best for "aggressive" investors who have a "willingness to accept substantial losses in short periods of time." The fund has about $144.4 million in assets under management.
As of early October 2023, the top five holdings of the Direxion Daily Aerospace & Defense Bull 3X Shares ETF were:
- Boeing
- RTX
- Lockheed Martin
- Northrop Grumman
- Textron (TXT 1.9%)
The Direxion Daily Aerospace & Defense Bull 3x has an expense ratio of 0.97%.
6. SPDR S&P Kensho Future Security ETF
6. SPDR S&P Kensho Future Security ETF
The SPDR S&P Kensho Future Security ETF (FITE 1.22%) tracks the S&P Kensho Future Security Index, a modernized version of a defense index. The Kensho index is designed to track companies that are focused on issues such as cybersecurity, advanced border security, military robotics, drones, and space technology. This is a relatively new fund and index, and the fund has about $31.7 million in assets.
As of early May, the top five holdings in the SPDR S&P Kensho Future Security ETF were:
- Varonis Systems (VRNS 1.09%)
- Qualys (QLYS 0.36%)
- Crowdstrike Holdings (CRWD 2.03%)
- Parsons (PSN 0.57%)
- AeroVironment
The fund states that about 33% of its assets are in aerospace and defense companies, with 30% in systems software companies and 8% in communications equipment makers. The SPDR S&P Kensho Future Security ETF has an expense ratio of 0.45%.
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Are they right for you?
Are defense ETFs right for you?
At times when markets get volatile, it's nice to have a little diversification in your portfolio. Defense ETFs, like ETFs focused on the broader industrials sector, are unlikely to generate market-beating returns day in and day out. However, they do provide a basket of companies that tend to perform well in challenging times and offer a steady stream of income throughout the cycle.
The world can be a dangerous place. Investors may sleep better knowing they have companies in their portfolios that are designed to keep them safe when times get tough.
Frequently asked questions
What is the highest-rated defense ETF?
There is not one set way to rate ETFs. Investors looking for the largest defense ETF should consider the iShares U.S. Aerospace & Defense ETF, while those interested in past performance would likely view the SPDR S&P Aerospace & Defense ETF, which was the top performing of these choices during the 12 months ending Oct. 24, 2023, as the best choice.
Is there a military defense ETF?
Most of the defense ETFs also have substantial commercial aerospace exposure, but for those who are focused solely on security -- both military and cyber -- the Kensho Future Security ETF is an intriguing option.
Which is better, the iShares or Invesco ETF?
Both are solid, but they offer slightly different options for investors. The iShares fund has a lower expense ratio, an important factor anytime you are looking at ETFs. But its two largest holdings are tied closely to the commercial aerospace sector, and not defense, so the Invesco ETF could be a better choice for investors who are most interested in investing in defense companies.
