✈️ Aerospace & Defense

Aerospace and defense spending follows geopolitical cycles, government budgets, and global threat perceptions. Unlike cybersecurity’s commercial focus, this sector depends heavily on government contracts — providing stability but also concentration risk. The choice between cap-weighted (ITA), equal-weighted (XAR), and modified approaches (PPA) significantly affects your exposure and risk profile.

For trading signals and relative charts, see Security & Defense Signals.

The Big Three: ITA vs XAR vs PPA

These are the core aerospace and defense ETFs. Understanding their weighting differences is crucial.

ITA — The Mega-Cap Play

ITA is the largest and most liquid aerospace & defense ETF, but also the most concentrated.

• Index: Dow Jones U.S. Select Aerospace & Defense Index
• Methodology: Market-cap weighted with 22.5% individual cap
• Top 10 concentration: ~76% of the fund
• Sector breakdown: ~99% Aerospace & Defense

Top holdings:

When to use ITA:

• You want maximum liquidity for active trading
• You’re bullish on mega-cap defense primes (GE, RTX, Boeing)
• You want the largest AUM and tightest spreads
• You’re comfortable with high concentration risk

XAR — The Equal-Weight Alternative

XAR offers dramatically lower concentration by equal-weighting all holdings, giving smaller defense contractors equal voice.

• Index: S&P Aerospace & Defense Select Industry Index
• Methodology: Equal-weighted, rebalanced quarterly
• Top 10 concentration: ~38-45% (vs. ITA’s 76%)
• Largest holding: ~4.5% (vs. ITA’s 21%)

When to use XAR:

• You want diversification across the defense sector
• You’re concerned about single-stock risk (Boeing volatility, GE concentration)
• You believe smaller defense contractors will outperform
• You want the lowest expense ratio (0.35%)

The trade-off: Higher turnover (35%) due to quarterly rebalancing. Slightly lower liquidity than ITA.

PPA — The Balanced Approach

PPA uses a modified market-cap weighting that reduces concentration while maintaining some size tilt.

• Index: SPADE Defense Index
• Methodology: Modified cap-weight (“TrueCap”) — reduces conglomerate overweighting
• Top 10 concentration: ~56% (between ITA and XAR)
• Holdings: 57-60 (broadest coverage)

Top holdings:

When to use PPA:

• You want balanced exposure between mega-caps and mid-caps
• You prefer more holdings for broader diversification
• You’re comfortable with higher expense ratio (0.58%)
• You want the oldest A&D ETF (launched 2005)

The trade-off: Highest expense ratio among the big three. Modified weighting is less transparent than pure cap or equal weight.

Comparing the Three

The XAR/ITA Ratio — A Key Signal

The ratio of XAR to ITA tells you whether equal-weight or cap-weight is leading:

• XAR/ITA rising: Smaller defense contractors outperforming — breadth expanding, risk-on within defense
• XAR/ITA falling: Mega-caps leading — flight to quality, narrow leadership

This ratio is particularly useful when assessing single-stock risk. When Boeing or GE faces headwinds, XAR/ITA tends to rise as equal-weight avoids the concentration hit.

Leveraged Options

DFEN — 3x Leveraged A&D

DFEN is the only leveraged option in the aerospace & defense space.

Key mechanics:

• Tracks same index as ITA with 3x daily leverage
• Daily reset creates path dependency
• Volatility decay erodes value in choppy markets
• AUM: ~$285 million

When traders use DFEN:

• Short-term directional bets (days, not weeks)
• Trading around defense budget announcements or geopolitical events
• Expressing high-conviction views on defense spending

When to avoid DFEN:

• Multi-week holds (decay is real)
• Uncertain market direction
• As a core portfolio holding

Defense Technology ETFs

SHLD — Global X Defense Tech ETF

SHLD focuses on emerging defense technologies rather than traditional contractors:

• Emphasis on innovation and tech-forward defense
• Includes AI, autonomous systems, and next-gen weaponry
• Newer fund (launched 2023) with growth orientation
• Lower expense ratio than PPA, higher than XAR

When to use SHLD:

• You want defense exposure with technology tilt
• You believe defense innovation will outperform traditional contractors
• You prefer growth-oriented defense plays

Space & Satellite ETFs

The militarization of space has created a new category bridging defense and space exploration.

UFO — Pure-Play Space

UFO offers the most focused space exposure, including:

• Satellite technology and infrastructure
• Rocket manufacturing (Rocket Lab, etc.)
• Space communications
• Government defense investment in space

Top holdings include:

• AST SpaceMobile (ASTS)
• Rocket Lab (RKLB)
• Traditional defense contractors with space divisions (Lockheed, RTX, Northrop)

Performance: Up 45%+ in 2025, driven by government defense investment and geopolitical competition.

ROKT — Final Frontiers

ROKT provides space exposure with significant defense overlap:

• 61% Industrials, 30% Technology
• ~50%+ weight in traditional aerospace & defense companies
• Includes both space AND ocean exploration
• Cheaper than UFO (0.45% vs 0.75%)

When to use ROKT:

• You want space exposure without abandoning defense contractors
• You prefer lower expense ratios
• You want broader “frontier” exposure

ARKX — Innovation Play

ARKX is actively managed by ARK Invest:

• Focuses on disruptive space innovation
• Includes commercial space, not just defense
• ARK’s signature high-growth, high-volatility approach
• Less defense-focused than UFO or ROKT

Fundamental drivers

Government Defense Budgets

Defense spending is the primary driver:

Commercial Aerospace Cycles

ITA and XAR include commercial aerospace exposure:

Geopolitical Events

Key ratios to monitor

For detailed signal interpretation, see Security & Defense Signals.

Common mistakes

Mistake 1: Ignoring concentration risk in ITA

GE Aerospace at 21% and RTX at 15% means ~36% of ITA is in just two stocks. If your thesis is “defense spending will rise,” XAR gives you that exposure without the single-stock risk.

Mistake 2: Holding DFEN for more than a few days

Leveraged ETF decay is real. A 10% up, 10% down sequence leaves you down ~9% in DFEN, not flat. Use it for directional bets measured in days, not weeks.

Mistake 3: Treating space ETFs as defense proxies

While UFO and ROKT have defense contractor overlap, they include commercial space companies with different risk profiles. Pure defense exposure requires ITA, XAR, or PPA.

Mistake 4: Chasing after geopolitical headlines

Defense stocks often spike on conflict news, then retrace. The sustainable move comes from actual budget increases, not headline fear.

Which ETF for which situation?

Quick reference

Sources

Related pages