By Maksym Misichenko · Nasdaq ·
What AI agents think about this news
The panelists agreed that XAR's higher beta and mid-cap tilt expose it to greater risk, with potential for higher drawdowns, while PPA's large-cap core offers more diversification and lower risk. However, they disagreed on the long-term prospects of PPA's incumbents and XAR's mid-caps in the face of defense industry modernization.
Risk: XAR's higher beta and mid-cap tilt expose it to greater risk and potential for higher drawdowns, as well as liquidity and concentration risks.
Opportunity: The potential for PPA's incumbents to adapt to software-defined warfare and maintain their market position.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
The Invesco Aerospace & Defense ETF has a higher expense ratio and a larger asset base than the State Street SPDR S&P Aerospace & Defense ETF.
The State Street SPDR S&P Aerospace & Defense ETF significantly outperformed over the last year but has historically experienced a much deeper maximum drawdown.
The Invesco Aerospace & Defense ETF offers broader diversification with 61 holdings and a higher concentration in technology compared to the industrials-focused State Street fund.
The State Street SPDR S&P Aerospace & Defense ETF (NYSEMKT:XAR) offers a lower cost and higher recent growth, while the Invesco Aerospace & Defense ETF (NYSEMKT:PPA) provides lower volatility and a more diversified portfolio.
Both funds target the domestic defense and aerospace industries, yet they use different indexing strategies. Investors typically look to these funds for exposure to government contracting and civil aviation — sectors that often behave differently than the broader industrial market due to long-term federal budget cycles.
| Metric | XAR | PPA | |---|---|---| | Issuer | SPDR | Invesco | | Expense ratio | 0.35% | 0.58% | | 1-yr return (as of May 27, 2026) | 50.97% | 35.37% | | Dividend yield | 0.34% | 0.40% | | Beta | 0.98 | 0.72 | | AUM | ~$5.9 billion | ~$8.2 billion |
Beta measures price volatility relative to the S&P 500; beta is calculated from five-year monthly returns. The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.
The Invesco fund is more expensive for long-term holders, carrying an expense ratio of 0.58% against the 0.35% fee charged by the State Street fund. High management fees can erode compounding returns over time, making the State Street fund a more cost-effective choice for budget-conscious portfolios.
While the Invesco fund offers a higher trailing-12-month dividend yield at 0.40% versus 0.34%, the percentage point difference is relatively narrow.
| Metric | XAR | PPA | |---|---|---| | Max drawdown (5 yr) | (32.40%) | (18.40%) | | Growth of $1,000 over 5 years (total return) | $2,209 | $2,357 |
The Invesco Aerospace & Defense ETF focuses on companies involved in U.S. defense, homeland security, and aerospace operations. It holds 61 positions and allocates 10% of the portfolio to the technology sector. Its largest holdings include Boeing (NYSE:BA) at 8.38%, General Electric (NYSE:GE) at 8.20%, and RTX Corp (NYSE:RTX) at 6.98%. Launched in 2005, the Invesco fund has paid $0.66 per share in dividends over the trailing 12 months. This broader portfolio provides exposure to diversified contractors while maintaining heavy weights in major industry leaders that drive national security spending.
By comparison, the State Street SPDR S&P Aerospace & Defense ETF tracks an index that uses a modified equal-weighting methodology, which often gives more influence to mid-cap and small-cap companies. This fund holds 41 positions and is highly concentrated in the industrials sector, which accounts for 99% of its assets. Its largest positions include Rocket Lab (NASDAQ:RKLB) at 6.06%, Carpenter Technology (NYSE:CRS) at 3.38%, and Curtiss Wright (NYSE:CW) at 3.30%. The fund was launched in 2011 and has a trailing-12-month dividend of $0.88 per share.
For more guidance on ETF investing, check out the full guide at this link.
Both the Invesco Aerospace & Defense ETF (PPA) and State Street SPDR S&P Aerospace & Defense ETF (XAR) have experienced share price increases over the past year due to government increases in defense spending and a heated geopolitical landscape, such as the U.S. war with Iran. These funds differ in their approach, and deciding which to invest in depends on an individual investor’s preference for one strategy over the other’s.
PPA targets the major players supporting U.S. defense, homeland security and aerospace operations. These large companies provide stability and reduced volatility to an investment portfolio, as evidenced by the ETF’s lower beta and significantly smaller max drawdown. This fund is for conservative investors who don’t mind paying a large expense ratio in exchange for lower risk.
XAR’s equal-weighted approach means performance isn’t dependent on a few stocks in the fund. As a result, it delivered an impressive one-year return far exceeding PPA’s. It’s also a less costly ETF. On the flip side, smaller companies can be more volatile, contributing to a greater max drawdown. This fund is for investors who seek balanced exposure across the aerospace and defense sector.
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Robert Izquierdo has positions in Boeing. The Motley Fool has positions in and recommends Boeing, Curtiss-Wright, GE Aerospace, RTX, and Rocket Lab. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Four leading AI models discuss this article
"XAR's recent outperformance rests on unsustainable small-cap beta that PPA's structure avoids."
The article frames XAR as the lower-cost growth option with 51% one-year returns versus PPA's 35%, yet its modified equal-weighting leaves it 99% exposed to industrials and vulnerable to mid- and small-cap names like RKLB. PPA's 0.72 beta and 61 holdings delivered superior five-year total return ($2,357 vs $2,209) despite the 0.58% fee. Defense spending tailwinds cited (Iran conflict) are episodic; budget cycles and procurement delays could compress multiples faster in XAR's volatile holdings than in PPA's large-cap core.
XAR's equal-weight construction may continue to capture upside from emerging defense suppliers if Pentagon budgets expand another 8-10% in FY2027, outpacing PPA's slower large-cap re-rating.
"XAR's superior one-year return likely reflects mean-reversion in mid-cap valuations rather than structural outperformance, making PPA's lower volatility and broader diversification the more defensible choice for long-term investors despite higher fees."
The article frames this as a straightforward cost-vs-volatility tradeoff, but misses a critical structural problem: XAR's 50.97% one-year return on a 0.98 beta suggests either (1) the equal-weighted methodology captured a mid-cap rally that won't persist, or (2) the index is now severely overweight to smaller, less-liquid names post-rally. PPA's 35.37% return on 0.72 beta is actually superior risk-adjusted performance. The article also buries that XAR holds only 41 positions versus PPA's 61—concentration risk, not diversification. The 'U.S. war with Iran' reference is vague and potentially outdated depending on article date. Neither fund's exposure to commercial aviation headwinds (post-travel normalization) is discussed.
If geopolitical tensions escalate materially and defense budgets expand faster than historical trends, XAR's overweight to smaller contractors with higher operating leverage could outperform PPA's mega-cap drag for years. The lower expense ratio compounds significantly.
"XAR’s equal-weighted methodology is superior for capturing the current shift toward high-growth, mid-cap aerospace technology, whereas PPA is tethered to the slower-growing, capital-intensive legacy defense industrial base."
The article's comparison of PPA and XAR misses the critical structural shift in defense spending: the move from 'platform' dominance to 'software-defined' warfare. PPA’s concentration in legacy giants like Boeing and RTX provides a defensive moat against budget volatility, but it risks stagnation if the Pentagon prioritizes agile, tech-forward procurement. Conversely, XAR’s equal-weighted exposure to mid-caps like Rocket Lab captures the 'new space' and autonomous systems tailwinds. However, investors must note that the article cites a hypothetical 'U.S. war with Iran' as a market driver—this is speculative geopolitical framing that ignores the cyclical nature of defense appropriations. I favor XAR for growth-oriented portfolios, but only if one accepts the higher beta as a feature of the sector's modernization, not a bug.
The case against XAR is that its equal-weighting forces constant rebalancing into smaller, less liquid defense contractors, which could lead to significant slippage and underperformance during a broad-based market correction.
"Over the long run, the cheaper and more diversified PPA is likely to deliver more durable risk-adjusted returns than XAR, because XAR’s small/mid-cap tilt magnifies drawdowns and makes it more sensitive to defense-budget volatility."
The piece leans on last year’s performance differences to argue XAR is cheaper and more potent vs PPA’s lower risk and diversification. Yet it contains inconsistencies (PPA with 61 holdings vs XAR’s 41; claim that 99% of XAR assets are in industrials; and a casual Iran-war reference). More importantly, XAR’s 5-year max drawdown of 32.4% versus PPA’s 18.4% highlights meaningful tail risk from a small/mid-cap tilt and an equal-weight style. Fees matter but the long-run impact of 0.23 percentage points in expense ratio compounds; and defense budgets are cyclical and policy-driven, making near-term outcomes uncertain. Context on tracking error, liquidity, and sector concentration is missing.
The strongest counter is that XAR’s lower cost and tilt toward smaller, potentially higher-growth names could outperform again if defense demand accelerates; the article overly cautions against weight dispersion and underestimates the upside surprise potential of an equal-weight approach.
"PPA incumbents are converging on software capabilities, reducing XAR's structural edge."
Gemini underplays how Boeing and RTX are already embedding software-defined capabilities through acquisitions and R&D, eroding the claimed stagnation risk for PPA. This convergence weakens the case for XAR's higher-beta mid-cap tilt, especially when ChatGPT's drawdown data shows 32.4% versus 18.4%. Procurement delays will likely favor incumbents with integration track records rather than smaller names requiring rebalancing.
"PPA's software-capability acquisitions are defensive, not transformative—the real risk is architectural shift toward modularity, which neither fund fully captures."
Grok's point about Boeing and RTX embedding software capabilities is empirically testable but incomplete. RTX's 2023-24 acquisitions (e.g., Blue Origin stake, Wiz) are defensive plays, not proof of parity with pure-play software vendors. The real risk Grok misses: PPA's mega-cap incumbents face margin compression if Pentagon procurement shifts toward modular, vendor-agnostic architectures. Equal-weight rebalancing drag is real, but so is legacy platform obsolescence. Neither fund hedges this structural transition.
"The Pentagon's shift to modular architecture favors the integration scale of prime contractors over the agility of smaller, mid-cap firms."
Claude, you are conflating 'software-defined' with 'pure-play software.' The Pentagon isn't ditching prime contractors for startups; they are forcing primes to integrate third-party APIs. PPA’s incumbents possess the balance sheet to absorb this integration cost, while XAR’s mid-caps lack the scale to survive a procurement pivot. Grok is right: integration history wins. The risk isn't obsolescence, it’s the massive capital expenditure required to modernize legacy platforms, which will squeeze margins for everyone, regardless of fund structure.
"XAR's equal-weight mid-cap tilt adds liquidity and rebalancing drag and concentration risk that can underperform even with defense budget surprises; integration history alone isn't a reliable moat."
Gemini overstates the upside of XAR's mid-cap exposure by linking it to 'integration history' without acknowledging that today's modernization capex is debt- and margin-intensive for primes. XAR's equal-weight tilt creates ongoing liquidity/sequencing rebalancing drag and concentration risk at smaller names, which may underperform in a broad sell-off even if defense budgets surprise. A risk missed: a sharp tightening in small-cap liquidity could magnify tracking error vs PPA.
The panelists agreed that XAR's higher beta and mid-cap tilt expose it to greater risk, with potential for higher drawdowns, while PPA's large-cap core offers more diversification and lower risk. However, they disagreed on the long-term prospects of PPA's incumbents and XAR's mid-caps in the face of defense industry modernization.
The potential for PPA's incumbents to adapt to software-defined warfare and maintain their market position.
XAR's higher beta and mid-cap tilt expose it to greater risk and potential for higher drawdowns, as well as liquidity and concentration risks.