The best defense ETFs are a reliable choice for investors looking to safeguard their portfolios against market volatility.
Consumers will continue to have a demand for the services and goods provided by the defense sector for as long as global insecurity continues to exist.
Although military firms aren’t as showy as computer companies, they do have a consistent stream of money in the shape of the United States government, which has a seemingly endless need for the goods that the industry produces.
This makes up for the fact that defense companies aren’t as innovative as tech companies.
Due to the high degree of predictability in their business operations and the consistency of the dividends that they hand out, stocks in the defense industry are often trustworthy contributors to the income-focused portfolios of investors.
However, there is not a single defense contractor that produces each and every component; therefore, in order to gain complete access to the defense sector, a company would need to buy all of the leading defense firms.
As a result, a smart approach to invest in this sector might be to do so through the use of an exchange-traded fund (ETF), which offers exposure to a diverse variety of companies operating in the aerospace and military industries.
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7 Best Defense ETFs in 2023
iShares US Aerospace & Defense ETF (ITA)
The iShares US Aerospace & Defense ETF is one of the best defense ETFs. It has a weight of 0.6% in the ITA index, which gives it the distinction of being the most important fund of its kind.
It had a total of $3.65 billion in net assets as of the beginning of May 2022 when we last checked in on it.
In order to provide investors with the chance to get exposure to domestic aerospace and defense businesses within the United States, as well as the commercial aerospace industry, the ETF has been particularly formed to have this objective as its primary objective.
The goal of this investment is to replicate the performance of the Dow Jones US Select Aerospace & Defense Index, which is made up of aerospace and the largest defense companies listed on the stock exchanges of the United States.
According to S&P Dow Jones Indices, the index tracks the progress of the aerospace and military subsector of the US equities market.
Typically, the fund will invest at least 80% of its assets in the index’s underlying securities or in investments with economic characteristics that are substantially identical to those of the index’s underlying securities.
The remaining 20% of the fund’s assets may be invested in derivatives such as futures, options, and swap contracts as well as cash and cash equivalents. The fund is not diversified in any way.
Early in the month of May, the top five holdings in the iShares US Aerospace & Defense ETF were as follows: Raytheon Technologies (RTX -0.06%), Lockheed Martin (LMT 0.36%), Boeing (BA 1.31%), and Northrop Grumman (NOC 1.77%). General Dynamics (GD 0.46%) was the fifth largest position.
There are a total of 39 different equities in the investment portfolio, with the top five holdings accounting for somewhat more than half of the total assets.
A fee of 0.42% is deducted from each dollar invested in the iShares US Aerospace & Defense ETF.
Invesco Aerospace & Defense ETF (PPA)
The Invesco Aerospace & Defense ETF (PPA 1.03%), which seeks to track the performance of companies engaged in the research and development, manufacturing, operation, and support of the aerospace, defense, and homeland security industries in the United States, has its foundation in the SPADE Defense Index.
These industries include research and development, manufacturing, operation, and support. To this day, the value of the ETF has increased to around 1.43 billion dollars.
The fund will typically allocate a minimum of 90% of its overall assets towards the acquisition of securities that constitute the underlying index.
The underlying index consists of common stocks of companies that have significant importance in the defense sector and are engaged in activities related to the development, manufacturing, operation, and support of defense, military, national/homeland security, and government space operations in the United States.
The fund has a lack of diversification.
Early in the month of May, the top five places in the Invesco Aerospace & Defense ETF were held by Northrop Grumman (NOC 1.77%), Lockheed Martin (LMT 0.36%), General Dynamics (GD 0.47%), and Raytheon Technologies (RTX -0.06%). Boeing (BA 1.31%) rounded out the top five positions.
The ETF contains 57 different types of assets.
The top five holdings account for approximately 35.3% of the total portfolio value. A cost ratio of 0.61% has been calculated for the Invesco Aerospace & Defense ETF.
SPDR S&P Aerospace & Defense ETF (XAR)
In spite of having a very low expense ratio of 0.47%, the SPDR S&P Aerospace & Defense ETF is responsible for the management of a sizeable number of assets totalling $1.58 billion.
This ETF focuses the majority of its investments on the companies that are included in the S&P Aerospace & Defense Select Industry Index.
The index was created with the intention of broadening the breadth of representation beyond the dominant “prime” contractors that are found in the upper tier of the military industry.
It is able to accomplish this by including exposure to both mid-cap and small-cap companies within the industry.
The objective of this investment is to generate investment outcomes that, prior to accounting for fees and expenditures, align with the overall performance of the S&P Aerospace & Defense Select Industry Index.
The fund utilizes a sampling technique in its efforts to monitor the performance of the S&P Aerospace & Defense Select Industry Index (referred to as the “index”).
The fund typically allocates a significant portion, amounting to at least 80% of its overall assets, towards the acquisition of securities that make up the index.
The index is a representation of the aerospace and military sector inside the S&P Total Market Index (S&P TMI).
The top five positions in the portfolio of the SPDR S&P Aerospace & Defense ETF were as follows as of the beginning of the month of May: Northrop Grumman (NOC 1.77%), Aerojet Rocketdyne (NYSE: AJRD), Huntington Ingalls Industries (HII 0.44%), and Howmet Aerospace (HWM 0.02%). Hexcel (HXL 1.49%) was the last of the top five holdings.
The top five holdings in the portfolio are responsible for approximately twenty percent of the total assets held in the portfolio.
There is a cost ratio of 0.35% associated with the SPDR Aerospace & Defense ETF.
ARK Space Exploration & Innovation ETF (ARXX)
Ark Invest, with Cathie Wood serving as its leader, oversees the active management of the ARK Space Exploration & Innovation ETF (ARKX -0.6%), which is a fund that focuses on aerospace assets.
This ETF has a significant emphasis, in general, on expansion, just like the bulk of Ark’s investing portfolio.
It is clear that the majority of the ARK Space Exploration ETF’s assets are invested in businesses that are active in some aspect of the space sector, such as the production of enabling technology or the provision of logistical support for aerospace operations.
The fund is now responsible for managing assets worth around 350 million dollars.
The primary objective of this investment strategy is to achieve sustained growth of capital over an extended period.
The fund is an ETF that follows an active management approach. It aims to predominantly invest (at least 80% of its assets) in domestic and overseas equity securities of companies involved in the investment topic of Space Exploration and Innovation.
Typically, the majority of the fund’s assets will be allocated to equity instruments, encompassing common stocks, partnership interests, company trust shares, and other forms of equity investments or ownership stakes in commercial organizations. The lack of diversity is evident.
Trimble (TRMB 0.88%), Kratos Defense & Security Solutions (KTOS -1.33%), 3D Printing ETF (PRNT 0.1%), L3Harris Technologies (LHX -0.42%), and AeroVironment (AVAV -0.72%) were the top five positions in the portfolio of the ARK Space Exploration & Innovation ETF as of the beginning of the month of May.
The top five assets account for roughly 36% of the total value of the portfolio. A cost ratio of 0.75% is demonstrated by the ARK Space Exploration & Innovation ETF.
There exists a prevalent misperception regarding the enduring suitability of thematic ETFs within investors’ portfolios.
The duration of the holding period is inversely proportional to the level of specificity, necessitating a higher degree of management.
Put simply, if an ETF has a lower level of diversification, it could potentially provide greater long-term risks for investors.
ARKX is an ETF that exhibits a shorter- to medium-term orientation, deviating from the practice of tracking an index.
The fund managers at ARKX consistently engage in rigorous securities research to carefully identify and choose the most promising stocks within the space exploration sector, with the objective of surpassing market performance.
The stock portfolio is subject to active management and regular updates in order to align with the underlying investment theory. The expense ratio of ARKX is 0.75%.
SPDR S&P Kensho Future Security ETF (FITE)
The performance of the S&P Kensho Future Security Index can be replicated with the help of the SPDR S&P Kensho Future Security ETF, which has an expense ratio that is nominally set at 0.1%.
This index is an updated version of a defense index that was previously published. Companies that place a high priority on topics such as cybersecurity, increased border security, military robotics, drones, and space technology will be tracked using the Kensho index, which has been designed expressly for this purpose.
Both the fund and the index in question have just recently been established, with the fund now having assets of around $30 million.
The objective of the SPDR S&P Kensho Future Security ETF is to achieve investment outcomes that, prior to accounting for fees and expenses, align with the overall performance of the S&P Kensho Future Security Index (referred to as the “Index”).
The objective of this initiative is to monitor an index that has been specifically formulated to encompass companies that are at the forefront of driving innovation in the realm of future security.
This includes domains such as cyber security, and advanced border security, as well as military applications in areas such as robotics, drones and drone technologies, space technology, wearable technologies, and virtual or augmented reality activities.
Investing in a portfolio of companies engaged in the future of warfare and national security may offer a potentially efficacious approach.
The following companies were among the top five holdings of the SPDR S&P Kensho Future Security ETF as of the beginning of the month of May: AeroVironment (AVAV -0.73%), Mandiant (NASDAQ: MNDT), Lockheed Martin (LMT 0.36%), and Northrop Grumman (NOC 1.77%). ManTech International (NASDAQ: MANT) was the fifth largest position.
In typical market circumstances, the fund typically allocates a significant portion, though no less than 80%, of its overall assets towards the securities that constitute the index.
The index consists of equity securities (including depositary receipts) of firms listed in the United States.
These companies are headquartered in various developed and emerging nations worldwide. The index includes companies that fall within the Future Security sector, as determined by a classification standard created by the index provider.
According to the data that was provided by the fund, around 35% of its assets are invested in the aerospace and defense industries, while 24% of its portfolio is composed of companies that specialize in systems software.
Additionally, the fund’s asset allocation includes 10.4% invested in companies that manufacture communications equipment. The SPDR S&P Kensho Future Security ETF has an expense ratio that is 0.45% of the fund’s total assets.
Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN)
The Dow Jones US Select Aerospace & Defense Index serves as the benchmark for the Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN 1.77%), which seeks to generate a daily return that is 300% higher than the return of the index that serves as the benchmark.
The product uses leverage as a strategy, and it is essential for investors to be aware that leveraged ETFs entail a significantly higher risk profile compared to standard ETFs, despite the fact that leveraged ETFs may offer larger potential returns.
According to the information that is presented on the official website of the company Direxion, the leveraged ETFs that are given by the firm are best suited for investors who have a high level of risk tolerance and a tendency to endure major financial setbacks within limited periods.
Approximately 230 million dollars worth of assets are currently managed by the fund.
The objective of this investment is to achieve daily investment results that are 300% of the daily performance of the Dow Jones US Select Aerospace & Defense Index, excluding any fees and charges.
The fund allocates a minimum of 80% of its net assets, including borrowed funds for investment purposes, towards financial instruments such as swap agreements, securities of the index, ETFs that mirror the index, and other financial instruments that offer daily leveraged exposure to the index or ETFs tracking the index.
The purpose of the index is to assess the overall performance of the aerospace and defense sector within the United States equity market. The fund has a lack of diversification.
Early in the month of May, the top five holdings of the ETF known as the Direxion Daily Aerospace & Defense Bull 3X Shares were as follows: Raytheon Technologies (RTX -0.06%), Lockheed Martin (LMT 0.36%), Boeing (BA 1.31%), Textron (TXT 0.87%), and TransDigm Group (TDG 0.33%).
The expenditure ratio of the Direxion Daily Aerospace & Defense Bull 3x can be broken down to 0.96 percent.
SPDR S&P 500 Aerospace & Defense ETF (XAR)
The fact that ITA and similar ETFs are market-cap weighted, giving larger companies a disproportionate share of the fund’s overall weight, is a frequent point of criticism. This may increase the danger of concentration.
As an illustration, Raytheon Technologies Corp. (RTX) and Boeing hold roughly 37% of ITA’s combined weight. An alternative could be an ETF like XAR.
With a total of 33 holdings as of this writing, XAR mimics the performance of the S&P Aerospace & Defense Select Industry Index using a modified equal-weight approach.
The result is a more even allocation of capital across major, mid-, and small-cap aerospace and military companies, which mitigates concentration risk. With an expenditure ratio of 0.35%, XAR is also less expensive than ITA.
Pensieri finali
During periods of market volatility, it is advantageous to incorporate diversification into one’s investment portfolio.
Many individuals choose to diversify their portfolios by investing in a mix of stocks, ETFs, and investment funds to spread risk and achieve their financial goals.
The best defense ETFs, similar to ETFs that concentrate on the wider industrials sector, are improbable to consistently produce superior market returns on a daily basis.
Nevertheless, these investment options do offer a diversified portfolio of companies that exhibit resilience during periods of economic adversity and consistently generate a reliable income stream across several market cycles.
Many high-net-worth individuals turn to private banking services to manage their wealth and investments with personalized care and expertise.
The global environment might present inherent risks and hazards. Investors can experience enhanced peace of mind by including resilient companies in their investment portfolios, which are specifically engineered to provide protection during challenging economic conditions.
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Adam è un autore riconosciuto a livello internazionale in materia finanziaria con oltre 830 milioni di visualizzazioni di risposte su Quora, un libro molto venduto su Amazon e un contributo su Forbes.
