Which Aerospace & Defense ETF Is a Better Buy: Big Bets or Broad Exposure?

The iShares U.S. Aerospace & Defense ETF (CBOE:ITA) offers a significantly lower expense ratio and higher 1-year performance, while the Invesco Aerospace & Defense ETF (NYSEMKT:PPA) provides broader diversification and higher five-year cumulative growth.

Both funds serve as primary vehicles for investors seeking exposure to the United States defense and aviation industries. While they track similar sectors, their differing weighting methodologies and cost structures result in distinct risk-return profiles for long-term shareholders.

Snapshot (cost & size)

Beta measures price volatility relative to the S&P 500; beta is calculated from monthly returns over the available fund history (up to five years). The 1-yr return represents total return over the trailing 12 months. Dividend yield is the trailing-12-month distribution yield.

The iShares U.S. Aerospace & Defense ETF is more affordable than its Invesco counterpart, with an expense ratio of 0.37% compared to 0.58%. The iShares fund also provides a slightly higher payout for income-seeking investors.

Performance & risk comparison

What's inside

The iShares U.S. Aerospace & Defense ETF focuses almost exclusively on the industrials sector, which represents 98% of its portfolio. Its largest positions include GE Aerospace (NYSE:GE) at 21.32%, RTX (NYSE:RTX) at 16.78%, and Boeing (NYSE:BA) at 9.16%. The fund holds 49 total securities and was launched in 2006. iShares U.S. Aerospace & Defense ETF has paid $1.06 per share over the trailing 12 months, which on its recent ~$249.69 share price works out to a 0.4% yield.

The Invesco Aerospace & Defense ETF maintains a more diversified stance with 62 holdings and significant exposure to technology at 11%, alongside an 87% weighting in industrials. Its top holdings include RTX at 8.13%, Boeing at 6.94%, and General Electric at 6.82%. It was launched in 2005. Invesco Aerospace & Defense ETF has paid $0.64 per share over the trailing 12 months, which on its recent ~$183.27 share price works out to a 0.3% yield.

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

Which looks like the better buy

The real story here isn't the expense ratio gap. It's what each fund is actually betting on. ITA's top three holdings, GE Aerospace, RTX, and Boeing, make up nearly half the portfolio, so an investor is largely making a call on how well those three primes execute over the next cycle, Boeing's ongoing production and quality issues included. PPA spreads that risk across more names and adds a slice of tech exposure, which softens the impact if any single contractor stumbles but also means the fund won't move as sharply when the sector as a whole is running hot, as it has over the past year. Both funds carry essentially the same volatility profile and similar five-year drawdowns, so this isn't a risk-tolerance question in the traditional sense, it's a concentration question. Investors who believe the current defense spending cycle favors the biggest primes and want the cheaper, more liquid way to play it should look at ITA. Investors who want the aerospace and defense theme without betting so heavily on any one contractor's execution, and who don't mind paying more for it, should look at PPA. I don't personally hold defense stocks directly. But for investors who do want that exposure, this is a sector bet more than a stock-picker's bet. Position sizing relative to any existing industrials exposure matters more than which ticker you choose.

Seena Hassouna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.