By Philip van Doorn
Various strategies for tracking the aerospace and defense industry have made good money for investors over the past 10 years
Archer Aviation Inc.’s sales are expected to ramp up after the company finishes building its first batch of vertical takeoff and landing aircraft.
This has been an amazing year for aerospace and defense stocks so far. A longer look back highlights three exchange-traded funds that have performed well by tracking this industry group in various ways.
This is also a good time to look at individual stocks to see which companies analysts expect to grow their businesses most rapidly as defense spending ramps up and pent-up demand for commercial aircraft, parts and maintenance services plays out.
A quick look at three aerospace and defense ETFs
It is difficult for any portfolio manager to outperform the S&P 500 SPX. Low-cost index funds that track the index can come close. Then there are index funds that track sectors or smaller industry groups. It may surprise you to see how well three exchange-traded funds focusing on the aerospace and defense industries have performed over the past decade.
Here is a 10-year chart comparing total returns, with dividends reinvested, for the three ETFs with those of the S&P 500 aerospace and defense (A&D) industry group and that of the full S&P 500. The ETFs are listed by how well they have performed:
Ten-year total returns with dividends reinvested through Aug. 20, 2025.
The S&P 500 is weighted by market capitalization, as are most broad stock indexes. So is its A&D subset. But the three ETFs use various methods to track the space and weight the stocks in their portfolios.
The Invesco Aerospace & Defense ETF PPA has been the best 10-year performer among the three exchange-traded funds listed here. It and the SPDR S&P Aerospace & Defense ETF XAR have outperformed the S&P 500 and its A&D industry group. The iShares U.S. Aerospace & Defense ETF ITA has also performed well, beating the 10-year return of the S&P 500 A&D industry group but trailing the return of the full S&P 500.
Here’s how the three ETFs track the aerospace and defense industries:
— The Invesco Aerospace & Defense ETF PPA was established in October 2005. It tracks the SPADE Defense Index and holds 55 stocks. Its annual expenses total 0.57% of assets under management. This means that annual expenses will be $57 for a $10,000 investment. This ETF is rated five stars (the highest rating) within Morningstar’s “U.S. Fund Industrials” category. The underlying index is reconstituted and rebalanced quarterly and weighted by market cap, with a limitation of 10% for each stock. According to FactSet, PPA’s “broadly defined” approach to A&D means it might “include firms in non-defense industries.”
— The SPDR S&P Aerospace & Defense ETF XAR holds 38 stocks as it tracks the S&P Aerospace & Defense Select Industry Index. The index is rebalanced quarterly with a modified equal-weighted approach, so it holds stocks of large-cap, midcap and small-cap companies. It has an expense ratio of 0.35%. This fund was established in September 2011 and has a five-star rating from Morningstar. According to FactSet, XAR’s portfolio “tends to reach outside our definition of the [A&D] segment into other sectors.”
— The iShares U.S. Aerospace & Defense ETF ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index of 37 stocks. The index follows a modified cap-weighting methodology that includes a 22.5% limit on individual stocks, but limits components with weightings higher than 4.5% to a total index weighting of 45%. The fund’s expense ratio is 0.38% and it is rated four stars by Morningstar. According to FactSet, this fund’s concentration risk “remains high despite the caps, reflecting the undiversified nature of the industry.”
Different weighting strategies
The largest three companies in the S&P 500 aerospace and defense industry group are GE Aerospace (GE), RTX Corp. (RTX) and Boeing Co. (BA). Together, these three companies make up 54% of the industry group’s combined market cap, according to FactSet.
According to the ETFs’ own published portfolio lists, these three stocks together make up 24.2% of the PPA portfolio, 10.6% of the XAR portfolio and 45.2% of the ITA portfolio.
In an interview with MarketWatch, State Street Investment Management Global Head of Research Strategists Matthew Bartolini explained his preference for the less-concentrated approach followed by the SPDR S&P Aerospace & Defense ETF.
A heavy cap weighting when “trying to harness the rise in defense spending” would mean that an investor’s exposure would “be less dictated by industry trends [and tied more to] the fortunes and failures of one specific firm,” he said.
Bartolini continued: “With a modified equal-weighted view, you will still have exposure to the large firms, but also to a greater part of the ecosystem, harnessing industry trends.”
Through Wednesday, the S&P 500 A&D industry group had returned 31.5% this year, while XAR had returned 29.3%. When asked about prospects for the underlying stocks after such large gains, Bartolini expressed confidence for the space long term, based on plans for increased defense spending by the U.S., Germany and other European countries.
“The geopolitical risk is elevated, which continues to call for aerospace and defense spending and solutions,” he said.
Stock screen-aerospace and defense
Combining the three ETFs’ holdings gives us a total of 64 stocks. To have a good sampling of estimates, we have cut the list to 50 companies covered by at least five analysts polled by FactSet and for which consensus sales estimates were available through 2027. The data was adjusted by FactSet to match calendar years, accounting for companies whose fiscal reporting periods don’t match the calendar.
Among the remaining 50 companies, these 10 are expected to show the highest compound annual growth rates (CAGR) for sales from 2025 through 2027:
Company Ticker Two-year estimated sales CAGR through 2027 Market cap ($mil)Held by
Archer Aviation Inc. ACHR 1,287.5% 5,954XAR, ITA
Rocket Lab Corp. RKLB 42.4% 19,629XAR, PPA, ITA
Palantir Technologies Inc. PLTR 35.1% 354,808PPA
Intuitive Machines Inc. Class A LUNR 32.5% 1,019XAR
BlackSky Technology Inc. BKSY 31.4% 579PPA
Redwire Corp. RDW 29.6% 1,253XAR
AeroVironment Inc. AVAV 24.1% 11,459XAR, PPA, ITA
Axon Enterprise Inc. AXON 22.5% 59,733XAR, PPA, ITA
C3.ai Inc. AI 21.2% 2,217PPA
Kratos Defense & Security Solutions Inc. KTOS 17.7% 10,848XAR, PPA, ITA
Source: FactSet
In comparison, the projected revenue CAGR for the S&P 500 from 2025 through 2027 is 5.4%, according to FactSet.
The projected CAGR for Archer Aviation (ACHR) reflects lofty expectations as the company nears completion of its first “Midnight” electric vertical takeoff and landing aircraft, designed for military and commercial use. The company had no revenue during 20024, and the consensus estimates are for sales totaling $2 million this year, increasing to $84 million in 2026 and $320 million in 2027.
Here’s more data, this time showing projected sales growth rates for the largest four companies by market cap held by any of the above ETFs in the aerospace and defense industry group, as defined by Standard & Poor’s:
Company Ticker Two-year estimated sales CAGR through 2027 Market cap ($mil)Held by
GE Aerospace GE 10.2% 282,543XAR, PPA, ITA
RTX Corp. RTX 5.9% 209,602XAR, PPA, ITA
Boeing Co. BA 12.3% 170,604XAR, PPA, ITA
Honeywell International Inc. HON 4.7% 137,773PPA
Source: FactSet
Click on the tickers for more about each company.
Read: Tomi Kilgore’s detailed guide to the information available on the MarketWatch quote page
Don’t miss: The S&P 500 is at its most expensive by this measure. These stocks have bucked the trend.
-Philip van Doorn
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08-23-25 1226ET
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