The Defense ETF Duel: Old Guard Aerospace or Next-Gen Tech?

Investors choosing between the Invesco Aerospace & Defense ETF (NYSEMKT:PPA) and the First Trust Indxx Aerospace & Defense ETF (NYSEMKT:MISL) will find two funds that target the defense sector, with slightly different cost structures and portfolio depth.

Both ETFs provide targeted exposure to companies involved in military, national security, and government space operations. While they operate in the same specialized niche, the Invesco fund is a veteran product with a much larger asset base, whereas the First Trust fund is a newer entrant with a leaner portfolio.

Snapshot (cost & size)

The Invesco fund is slightly more affordable with an expense ratio of 0.58%, compared to 0.6% for its First Trust counterpart. Additionally, the Invesco fund provides a higher payout with a dividend yield of 0.4%.

Performance & risk comparison

What's inside

The Invesco fund is more established, having launched in 2005. Its portfolio leans into industrials at 89%, technology at 10%, and basic materials at 1%, with 68 holdings total. Its largest positions include RTX (NYSE:RTX) at 9.01%, GE Aerospace (NYSE:GE) at 8.93%, and Boeing (NYSE:BA) at 8.91%. Invesco Aerospace & Defense ETF has paid $0.66 per share over the trailing 12 months, which, on its recent ~$155.0 share price, works out to a 0.4% yield.

The First Trust fund is a more recent arrival, having launched in 2022. It tracks the Indxx U.S. Aerospace & Defense Index and maintains a more concentrated group of 39 holdings. While industrials dominate at 80%, they have a higher technology allocation of 18% and a 3% position in communication services. Its largest positions include Palantir Technologies (NASDAQ:PLTR) at 13.89%, Space Exploration Technologies (NASDAQ:SPCX) at 9.42%, and RTX at 8.00%. First Trust Indxx Aerospace & Defense ETF has paid $0.03 per share over the trailing 12 months, which, on its recent ~$42.2 share price, works out to a 0.1% yield.

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Which looks like the better buy

When comparing the Invesco Aerospace & Defense ETF (PPA) and the First Trust Indxx Aerospace & Defense ETF (MISL), investors should consider several key factors. Let's see what they tell us about each fund.

First, we should examine each fund's strategy. PPA focuses on traditional aerospace companies and industrial military suppliers. It is a more established fund with a history dating back over 20 years and more than $7.2 billion in AUM. MISL, on the other hand, is a more recent entrant. The fund was established in 2022 and has a more modern defense-tech strategy. For example, its largest holding is Palantir, followed by SpaceX.

Two other important factors are historical performance and income potential. Since 2022, PPA has generated a total return of 117%, equating to a compound annual growth rate (CAGR) of 21.6%. MISL, meanwhile, has delivered a total return of 105%, with a CAGR of 19.8%. PPA has modestly surpassed the S&P 500's return over this period; MISL has fallen just short of it. Neither fund is a significant dividend payer, although PPA offers a slightly higher yield at 0.4% versus 0.1% for MISL.

One final factor to weigh is cost. Both funds have room for improvement in their fees. PPA has an expense ratio of 0.58%, while MISL has an expense ratio of 0.60%. Both of these rates are slightly above the average ETF expense ratio and far beyond what most investors will pay for index ETFs. For context, a person who buys $10,000 of PPA and MISL should expect to pay $58 in annual fees for their PPA shares and $60 for their MISL shares.

In summary, PPA and MISL are both ETFs built around aerospace stocks, however, they vary in significant ways. In the head-to-head matchup, PPA comes out on top in several factors, including historical performance, yield, and cost. Therefore, some investors may elect PPA. Yet, given MISL's forward-looking approach and significant stakes in SpaceX and Palantir, more aggressive investors may prefer MISL to its more conservative counterpart.

Jake Lerch has positions in Boeing and Space Exploration Technologies. The Motley Fool has positions in and recommends Boeing, GE Aerospace, Palantir Technologies, and RTX. The Motley Fool has a disclosure policy.