The ETF That Profits From Global Conflict

In 2023, U.S. military and defense spending was $820.3 billion.

2024 is set to come in at $841.4 billion.

Conflicts from Ukraine to the Middle East continue to spread and spend U.S. dollars.

Is it any surprise financial pros are looking to cash in on this trend?

Although there aren’t many ETFs dedicated to Aerospace & Defense, financial pros made Invesco’s Aerospace & Defense ETF PPA their clear #1 pick.

Although this ETF isn’t well-known, and the expense ratio is a bit pricey, it boasts a stellar track record with strong management and history.

If you’re looking at a diversified defense play, here’s what you need to know.

Key Facts About PPA

• Net assets: $4.5 billion
• 12-month trailing yield: 0.57%
• Inception: October 26, 2005
• Expense ratio: 0.57%
• Number of holdings: 55

The PPA tracks the SPADE®Defense Index, which comprises U.S. companies involved in the development, manufacturing, and support of aerospace and defense technologies. 

The ETF employs a modified market capitalization-weighted methodology, providing exposure across large, mid, and small-cap companies within the sector.

Despite the market cap-weighted approach, the ETF isn’t as heavily weighted towards the top holdings as you might expect.

Source: Invesco

Most of these names are probably familiar to you.

Companies like Raytheon make anti-tank Javelin missiles you probably heard being used in Ukraine.

Boeing also makes this list as its business encompasses commercial and governmental aeronautical products as well as defense systems. 

What’s fascinating is the balance of allocation across market caps and styles with just 55 stocks in the portfolio.

Source: Invesco

Performance

As we mentioned earlier, PPA boasts an impressive performance.

In fact, it just edges out the S&P 500 over most measured time periods.

Source: Invesco

Competition

As there aren’t many defense-related ETFs, the list we have doesn’t come with high liquidity. Also, we included Ark’s Space & Exploration ETF to round out our list to help provide points of comparison.

• iShares U.S. Aerospace & Defense ETF (ITA): Focuses on top U.S. aerospace and defense firms, with heavy concentration on industry giants. Market-cap weighted, favoring large-cap stocks. Aims for pure defense and aerospace play.
• SPDR S&P Aerospace & Defense ETF (XAR): Equally weights U.S. aerospace and defense stocks, giving smaller players a bigger voice. 
• Global X Defense Tech ETF (SHLD): Targets global defense tech innovations, from cybersecurity to advanced weaponry. Differentiates with a tech-forward approach, blending traditional defense with cutting-edge technology.
• ARK Space Exploration & Innovation ETF (ARKX): Focuses on space exploration and innovative tech, blending aerospace giants with disruptors in satellite, robotics, and 3D printing. Actively managed, seeking game-changing space opportunities.

While the ITA is the most liquid ETF, it’s return is substantially lower than PPA’s over a 3-year period.

The AKRX actively managed fund is the worst of the group, charging the highest fees yet delivering the worst performance.

Our Opinion 10/10 

Although the PPA isn’t as popular as the ITA, we prefer it for its higher diversification and overall performance.

Fees are a touch higher, but not enough to materially impact overall performance.