Aerospace ETF Showdown: XAR vs. ITA

Both the State Street SPDR S&P Aerospace & Defense ETF (NYSEMKT:XAR) and the iShares U.S. Aerospace & Defense ETF (NYSEMKT:ITA) target the U.S. aerospace and defense industry, a sector often driven by government contracts and global security needs. While ITA follows a traditional market-cap weighting, XAR utilizes a modified equal-weight strategy, offering a different way to gain exposure to these industrial giants for long-term investors.

Snapshot (cost & size)

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 State Street fund is slightly more affordable with an expense ratio of 0.35%, undercutting the iShares fund 0.38% fee. However, investors seeking income may prefer the iShares fund, which provides a higher trailing distribution yield of 0.49%.

Performance & risk comparison

What's inside

The State Street SPDR S&P Aerospace & Defense ETF holds 41 stocks, focusing on an equal-weighted approach to prevent any single company from dominating the portfolio. Its largest positions include Rocket Lab at 6%, Intuitive Machines at 3.31%, and Carpenter Technology at 3.29%. Launched in 2011, the fund has paid $0.88 per share over the trailing 12 months.

In contrast, the iShares U.S. Aerospace & Defense ETF is more top-heavy, with 44 holdings led by massive companies. Its largest positions include GE Aerospace at 20%, RTX Corp. at 14.3%, and Boeing at 9.5%. Launched in 2006, the fund has a trailing-12-month dividend of $1.07 per share.

For more guidance on ETF investing, check out the full guide at this link.

What this means for investors

The aerospace and defense pocket of the industrials market sector has been a hot commodity in recent years as geopolitical events like the Iran war and technological milestones like artificial intelligence command market headlines. The upcoming historic initial public offering of Elon Musk’s SpaceX has also excited investors. But picking a single winner in this dynamic market sector may seem like a tall task for the average investor. With aerospace-focused exchange-traded funds, you’ll get exposure to the best of the best in the business, without the added complexity and risk of following the results of individual companies.

The major difference between ITA and XAR is the way they weight their holdings. ITA seeks to match the Dow Jones U.S. Select Aerospace & Defense Index, which measures the performance of the aerospace industry. The fund is market-cap-weighted, which means the larger companies with higher total market values naturally make up a larger share of the fund’s assets. There is a limit to this, as the fund managers cap any single company’s weight at 22.5% to maintain some diversification. That’s different from the XAR ETF, which tracks the S&P Aerospace & Defense Select Industry Index and is equal-weighted, meaning each of its approximately 40 holdings should hold the same amount of influence over the overall fund.

Choosing between the two funds ultimately comes down to your goals as an investor. XAR’s equal-weight approach has outperformed ITA’s returns over the past few years, which should appeal to those who are looking for the best returns. More conservative investors, and those looking for greater income potential, may prefer ITA, which is heavily weighted toward industry giants GE Aerospace, RTX, and Boeing. These more well-established companies are more likely to pay dividends, and while their size may limit their upside, they are less prone to the volatility that comes with the more experimental phases of cutting-edge technology.

Sarah Sidlow has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing, Curtiss-Wright, GE Aerospace, Intuitive Machines, RTX, and Rocket Lab. The Motley Fool has a disclosure policy.