A Comprehensive Analysis and Comparative Review of US Aerospace & Defense and Space Exploration ETFs

Executive Summary

This report provides an in-depth, expert-level analysis of the US aerospace and defense (A&D) market and a detailed comparative review of six key exchange-traded funds (ETFs) that provide exposure to this sector. The analysis is designed to equip sophisticated investors with the data and insights necessary to navigate this complex and strategically important market. The US A&D sector is poised for robust growth, driven by a confluence of geopolitical tensions, substantial defense budget increases, and rapid technological innovation in areas such as artificial intelligence, autonomous systems, and space technology. This growth, however, is tempered by persistent challenges like inflationary pressures and complex supply chain dynamics.

The six ETFs reviewed—ITA, PPA, XAR, ARKX, DFEN, and SHLD—represent a spectrum of investment strategies, from traditional cap-weighted indices to actively managed, leveraged, and thematic funds. This analysis reveals that there is no single "best" fund, but rather a strategic choice that depends on an investor’s risk tolerance, desired exposure, and investment horizon. The analysis highlights distinct differences in portfolio concentration (ITA and PPA are heavily concentrated in large-cap firms, while XAR offers a more equal-weighted, diversified approach), thematic focus (ARKX and SHLD provide targeted exposure to emerging defense and space technologies), and risk profile (DFEN, as a leveraged fund, is suited exclusively for short-term, tactical trading and carries extreme volatility).

1. The U.S. Aerospace & Defense Market: A Macro Perspective

This section establishes the foundational context for the ETF analysis by detailing the key drivers and challenges shaping the US A&D market.

1.1. Market Dynamics and Growth Catalysts

The United States A&D market is a global behemoth, with its size estimated at USD 525.16 billion in 2025 and projected to grow to USD 694.86 billion by 2030, representing a Compound Annual Growth Rate (CAGR) of 5.76% during that period. This robust advancement is underpinned by a foundation of technological innovation and manufacturing excellence across an extensive infrastructure network. Growth is fueled by several interconnected factors, including increasing air travel demand, rising space activities, and the imperative of military modernization. The sector is also experiencing a "manufacturing renaissance" spurred by federal initiatives, with recent attention shifting from electric vehicle and clean energy sectors to A&D, driven by stepped-up funding from the Department of Defense (DoD).

A significant driver of this transformation is the rapid adoption of new technologies. The industry is experiencing a transformative shift driven by advancements in artificial intelligence (AI), autonomous systems, advanced materials, and 3D printing. For example, the Pentagon announced a new program in April 2023 focused on building thousands of autonomous systems to enhance military capabilities. Similarly, the successful test flight of a subscale autonomous cargo airplane in the same month showcases the industry's progress in developing unmanned systems. AI is increasingly integrated into military and civilian products, requiring sophisticated hardware such as semiconductors.

1.2. Geopolitical and Fiscal Tailwinds

The United States maintains its position as the world's largest defense spender, with a substantial defense budget of USD 876.9 billion in 2022. This significant financial commitment is further exemplified by the Department of the Air Force's budget request of USD 194 billion for FY 2023, an 11.7% increase from the previous year, and the US Space Force's request for USD 30 billion for FY 2024, a 13% increase. This sustained public spending provides remarkable stability for the A&D sector, largely due to the widespread use of long-term government contracts for most services.

Escalating geopolitical tensions, particularly in the Indo-Pacific and Eastern Europe, have accelerated growth and procurement initiatives. The Russian invasion of Ukraine, for instance, contributed to a 13% rise in military expenditures in Europe in 2022, marking the largest yearly increase since the conclusion of the Cold War. This evolving global security landscape has also prompted A&D manufacturers to actively domesticate their supply chains to enhance national security and reduce reliance on foreign suppliers. The DoD's National Defense Industrial Strategy Implementation Plan for fiscal year 2025 emphasizes reshoring critical parts and materials, a strategic move that is creating new demand for industrial facilities across the US.

1.3. Challenges and Contradictions

Despite the strong demand, the A&D industry faces significant headwinds. Operating margins for A&D companies have eroded by 170 basis points since 2018, dropping from 10.5% to 8.8% in 2023. This is due to rising costs for both industrial inputs and specialized labor, driven by sector-specific inflationary pressures that are often decoupled from broader macroeconomic trends. The A&D supply chain is extensive and intricate, involving hundreds of Tier 1 suppliers and thousands of suppliers across all tiers. The strategic shift to onshoring, while necessary, will require significant effort and capital investment, potentially delaying production timelines and exacerbating cost pressures in the short to medium term.

The analysis of market dynamics reveals a self-reinforcing cycle driven by public policy and innovation. Geopolitical tensions lead to increased defense spending, which in turn fuels research and development and the adoption of cutting-edge technologies like AI and autonomous systems. These technological advancements not only enhance military capabilities but also create new commercial applications and attract a new class of non-traditional A&D companies, such as Palantir and Amazon. The demand for these new technologies also puts specialized skills and materials at a premium, contributing to the inflationary pressures and eroding margins noted by industry analysis. This illustrates a fundamental reshaping of the industry's composition.

2. Core ETF Profiles: A Detailed Breakdown

This section provides a deep dive into each of the six ETFs, detailing their specific strategies, holdings, and key characteristics.

2.1. iShares U.S. Aerospace & Defense ETF (ITA)

ITA is a passively managed, market capitalization-weighted ETF that tracks the Dow Jones U.S. Select Aerospace & Defense Index. Its strategy is to provide exposure to the traditional, core players in the sector. The fund holds fewer stocks and is highly concentrated in its top holdings. For example, its top 3 holdings—GE Aerospace, RTX Corp, and Boeing Co—account for over 45% of its portfolio weight. This concentration reflects the cap-weighted nature of the fund and its focus on industry giants. With an expense ratio of 0.38%, ITA is positioned as a low-cost option for broad sector exposure. It is also noted for being less liquid and more heavily concentrated than its counterpart, PPA.

2.2. Invesco Aerospace & Defense ETF (PPA)

PPA tracks the SPADE® Defense Index and aims to identify a group of companies involved in US defense, homeland security, and aerospace operations. PPA is less concentrated than ITA, with 56 holdings. While still heavily invested in large-cap companies (83.38% of assets), it has a slightly higher number of holdings and a lower concentration in its top 10 (56.84%) compared to some peers. The fund is overwhelmingly invested in the US, with small holdings in Israel and Canada. PPA's expense ratio is 0.58%, making it more expensive than ITA but more diversified.

2.3. SPDR S&P Aerospace & Defense ETF (XAR)

XAR's key differentiator is its equal-weighted index strategy. This approach, unlike cap-weighted funds, gives smaller and mid-sized companies the same influence as the industry giants, thereby reducing company-specific risk. By equal-weighting, its top holdings are not dominated by the largest defense contractors. This provides a more balanced portfolio and exposure to a different segment of the market. The equal-weighted approach is evident in its top holdings, which include Rocket Lab and Kratos Defense & Security Solutions with higher weightings than found in cap-weighted funds. At 0.35%, XAR has the lowest expense ratio among the funds compared, making it an attractive option for cost-conscious investors.

2.4. ARK Space Exploration & Innovation ETF (ARKX)

ARKX is a highly thematic and actively managed fund, focusing on "Space Exploration". It is not strictly a defense ETF, but its theme overlaps significantly with the A&D sector, as many space innovators are also military contractors. The fund's holdings reflect its thematic focus, including non-traditional A&D firms that enable space exploration through technology. Its portfolio is also more diversified across market capitalizations, with a significant presence of mid-cap (40.84%) and small-cap (16.48%) companies. Its top 10 holdings include tech firms like Amazon, Nvidia, and Palantir alongside traditional A&D firms, showcasing its broad interpretation of the theme. As an actively managed fund, ARKX has a higher expense ratio of 0.75%, but this is relatively inexpensive for active management.

2.5. Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN)

DFEN is a leveraged ETF designed to provide 3X daily leveraged exposure to the aerospace and defense sector. This fund is not a buy-and-hold investment and is explicitly designed for short-term, tactical trading. The fund achieves its leverage through financial instruments like swap and futures agreements. It engages in daily rebalancing, which means its returns over periods longer than one day will differ significantly from 300% of the underlying index's return. The most significant risk is the effect of compounding, which can cause the fund to lose money over time even if the underlying index increases over the same period. This makes it highly unsuitable for all but the most sophisticated, short-term traders. The fund is highly concentrated in industrials (99.28%) and a small portion in technology (0.72%), with 76.4% of assets held in its top 10 holdings.

2.6. Global X Defense Tech ETF (SHLD)

SHLD is a new thematic ETF (inception September 2023) that focuses on the "defense tech" theme, a sub-sector of the A&D industry. It tracks the Global X Defense Tech Index. This fund offers a mix of traditional defense contractors and technology companies involved in defense-related software. It also features greater geographic diversification than its peers, with only 59% exposure to the US. The top holdings showcase its hybrid approach, including traditional players like RTX, Lockheed Martin, and Northrop Grumman alongside tech firms like Palantir and international companies like Rheinmetall AG. SHLD has a competitive expense ratio of 0.50%.

The traditional A&D market has a high concentration of large-cap, slow-growing companies whose stability comes from government contracts. However, market research points to new drivers like AI, cybersecurity, and autonomous systems. The emergence of ETFs like SHLD and the inclusion of companies like Palantir and Amazon in funds like ARKX demonstrates that the investment community no longer views the sector as a monolith of old-line contractors. This signifies a fundamental redefinition of what constitutes a "defense company." The new definition includes software and technology firms whose products and services are crucial to military modernization and innovation. This creates a new investment category, "Defense Tech," that is more dynamic and growth-oriented than traditional A&D.

3. Comparative Analysis: Performance, Holdings, and Risk Metrics

This section synthesizes the individual ETF profiles to provide a direct, side-by-side comparison of their key characteristics and performance.

3.1. Strategic Analysis of ETF Differentiators

The strategic choices made by fund managers are critical to understanding their potential. The most traditional funds, ITA and PPA, are cap-weighted and thus are heavily influenced by the performance of a few mega-cap companies.5 In contrast, XAR's equal-weighted approach provides broader diversification and greater exposure to the growth of mid- and small-cap firms within the sector.12 Thematic ETFs like ARKX and SHLD, by nature, represent a targeted and dynamic approach. These funds are not bound by a strict market-cap index, allowing them to include holdings that are not purely A&D-focused, such as technology companies that provide enabling services.7 This targeted strategy aims to capture the high-growth potential of emerging sub-sectors.

The leveraged exception, DFEN, must be analyzed separately from all other funds. Its purpose is to provide multiplied daily returns, a mechanism that makes it fundamentally different from the other ETFs.8 Because of daily rebalancing, its returns over periods longer than a single day will not correlate directly with the underlying index. This structural difference makes DFEN a tool for highly sophisticated traders, not for long-term investors.14

3.2. Insights and Interpretive Commentary

A review of the performance data reveals that a fund’s performance is a direct reflection of its strategy. DFEN has the highest short-term returns, with a 1-year return of 103.3% and a YTD return of 109.0%.14 This is a direct function of its leveraged structure and comes with extreme volatility and risk. A more meaningful comparison can be found among the passive and thematic funds. Thematic funds like SHLD and ARKX, with their focus on high-growth areas like defense software and space technology, have demonstrated impressive recent performance (e.g., SHLD's 1-year return of 82.43% and ARKX's 71.2% versus ITA's 43.83%).13 This suggests that a targeted, growth-oriented strategy has been highly rewarded in the recent market climate. Conversely, the more traditional, cap-weighted funds like ITA and PPA have provided strong but more moderate returns, reflecting the stability of their large-cap holdings.19 The data shows a direct relationship: a willingness to accept a higher risk profile (leverage) or a more focused, concentrated growth strategy (thematic ETFs) has led to higher, albeit more volatile, returns.

Another factor of interest is the ESG profile of these funds. Conventional wisdom might assume that defense companies have low ESG scores. However, the provided data shows a range of scores from 5.36 (ITA) to 5.86 (XAR) on a 10-point scale.5 While high-impact activities like weapons involvement naturally lower ESG scores, the data also incorporates other factors such as board independence and environmental impact metrics like carbon intensity and water stress.5 This reveals that the ESG profile of these funds is more complex than a simple binary assessment, encompassing corporate governance and environmental footprint in addition to their core business.

4. Strategic Investment Considerations and Recommendations

This section translates the detailed analysis into practical guidance for investors, aligning ETF selection with various investor profiles.

4.1. Matching ETF Selection to Investor Profile

For investors seeking to add a stable, diversified A&D component to their long-term portfolio, ITA or PPA are suitable choices. The selection between the two depends on a trade-off: ITA offers a lower expense ratio (0.38%) and higher concentration, while PPA provides a slightly higher expense ratio (0.58%) for broader diversification.5

For investors who want to avoid the concentration risk of cap-weighted funds and gain exposure to the broader, more dynamic ecosystem of the A&D sector, including smaller players, the XAR ETF is the ideal choice. Its equal-weighted approach ensures that the fund's performance is not beholden to just a few industry giants.12

Investors with a higher risk tolerance and a conviction in specific themes should consider ARKX or SHLD. ARKX is a focused investment on the future of space exploration and its enabling technologies 7, while SHLD targets the convergence of defense and technology, with a valuable layer of geographic diversification.8 These funds represent a more dynamic, growth-oriented approach.

4.2. A Strong Warning on Leveraged Funds

A prominent and dedicated section is necessary to address DFEN. This fund is fundamentally different from the others and is not suitable for the average retail investor.14 The concept of daily rebalancing, combined with the volatility of the underlying sector, can lead to the erosion of returns over time, even if the index performs positively.14 The fund’s performance is a direct reflection of its leveraged structure. Therefore, the recommendation is a clear and direct warning: DFEN is a tool for highly sophisticated traders with a clear, short-term tactical objective, not for buy-and-hold investing.8

5. Conclusion

The US A&D market is a robust and growing sector driven by geopolitical, fiscal, and technological forces. The ETF landscape offers a range of strategies to gain exposure, from traditional index-tracking funds to innovative, thematic, and high-risk leveraged products. The choice of ETF is a direct reflection of an investor's strategic intent. Whether an investor seeks the stability of established giants through cap-weighted funds, the broad diversification of an equal-weighted approach, or the high-growth potential of a thematic strategy, the US market provides a multitude of options.