In a world where Russia, China, and various terrorist groups are a continual threat, the United States military plays a key role in keeping these organizations subdued and the world safe.
Our military may have fewer soldiers than China's. Still, our financial might and relentless search for innovation ensure our fighting forces remain the best in the world. This is a massive advantage for both America and its NATO allies.
Why invest in the U.S. military?
A big part of being the best military in the world is a continual investment in new weapons, technology, and military aircraft. Rather than rely on government spending, the military has forged deep relationships with defence contractors. These companies eat the original development cost, hoping to earn a lucrative military contract.
It's the quintessential American way. The government gets what it needs, our soldiers are protected when they head into a warzone, and investors can make a healthy profit. Everyone wins.
Several companies that work hand-in-hand with the U.S. military have been terrific investments over the years, handily beating broad market indexes. Stocks like Lockheed Martin (LMT), Boeing (B.A.) and Raytheon Technologies -- which is known as RTX Corp (RTX) these days -- have all delivered excellent long-term returns.
Rather than trying to pick individual stocks, investors looking for exposure to this specific industry can simply buy an ETF. Such an investment gives investors instant diversification, can usually be purchased without paying brokerage commissions, and takes the guesswork of trying to pick the right stock. Tax requirements are generally much more straightforward, too.
What are the best defense ETFs to buy now?
- iShares U.S. Aerospace & Defense ETF (ITA)
- Invesco Aerospace & Defense ETF (PPA)
- SPDR S&P Aerospace & Defense ETF (XAR)
- ARK Space Exploration & Innovation ETF (ARKX)
- Direxion Daily Aerospace & Defense Bull 3x Shares (DFEN)
iShares U.S. Aerospace & Defense ETF
The iShares U.S. defense ETF is the largest, most liquid, and most widely held of the various defense ETFs. It is the go-to ETF for many hedge funds or professional traders who want exposure to this vital sector. And it is managed by Blackrock, one of the leaders in the ETF space.
This ETF offers instant diversification in the defense industry with 34 underlying holdings. The five largest holdings are pretty much what you'd expect -- including Boeing, RTX Corp, Lockheed Martin, Transdigm Group (TDG) and General Dynamics (G.D.). But it also has small stakes in more consumer-facing companies, such as Smith & Wesson and National Presto Industries.
This is the largest defense ETF, with some $5.6B worth of assets as of August 2023. It offers plenty of liquidity, trading more than half a million daily shares. It also comes with a reasonable 0.40% management expense ratio. And it even pays a small dividend, with a yield of approximately 1%.
Probably the best feature of this ETF is its long history of delivering excellent capital gains for its investors. Since its inception (May 2006) until August 2023, this fund has delivered total returns of 10.55% annually, a solid long-term result spanning different economic conditions.
Invesco Aerospace & Defense ETF
The Invesco Aerospace & Defense ETF follows a slightly different index than the iShares ETF. This fund tracks the SPADE Defense Index, which identifies companies involved in developing, manufacturing, operations, and supporting U.S. defense, homeland security, and aerospace operations.
Top holdings of this fund include Boeing, Northrop Grumman (NOC), Lockheed Martin, RTX Corp, and General Electric. It has over 50 different holdings, but the fund is fairly concentrated—the largest ten holdings of this ETF account for just over 50% of assets.
This defense ETF isn't quite as large as the iShares one, but it is still sufficiently large enough for retail investors. It has nearly $2B worth of assets and trades almost 100,000 daily shares. This ETF has reasonable expenses, too, charging investors a 0.58% management fee. It also pays a small dividend, yielding approximately 0.6%.
Morningstar gives this fund a solid four-star rating for its history of delivering solid returns to its investors. In the decade spanning August 2013 to 2023, the fund has increased its NAV by more than 14% annually. Past performance is no guarantee of future results, of course. Still, many investors believe an investment in the U.S. military via this ETF will continue to deliver excellent investment returns.
SPDR S&P Aerospace & Defense ETF
Slate Street offers the SPDR S&P Aerospace & Defense ETF, which tracks the S&P Aerospace & Defense Select Industry Index. Its investment objective is to allow investors to take a strategic or tactical position at a targeted level in the defense industry.
The index tracked by this fund is a modified equal weighting index, which means this fund has more significant positions in fewer stocks, at least when compared to other similar ETFs. Top holdings of this ETF include Textron (TXT), Woodward Inc. (WWD), Transdigm, Curtiss Wright Corp (C.W.) and General Dynamics (G.D.). In total, this fund has approximately 30 different holdings.
According to its prospectus, the fund has a 0.35% management fee. This is the lowest fee of all its peers and an important consideration for ETF investors. After all, we all know that higher fees translate into lower investment returns. It is also a large fund, with approximately $1.3B in total assets. It trades about 37,000 shares daily and offers a fund distribution yield of about 0.5%.
Like the previous funds on this list, this ETF has delivered excellent after-tax returns, and its low fees ensure its returns are quite close to the index returns. Since the fund's inception in September, 2011 through to August 2023, it has delivered gross returns of 15.79% per year and a return after tax on distributions of 15.41% annually.
ARK Space Exploration & Innovation ETF
This ETF is a little different than the ones profiled above. The ARK Space Exploration & Innovation ETF is an actively managed fund that seeks long-term growth by investing at least 80% of its assets in companies that are involved in space exploration and innovation. Many of these companies are also military contractors, and the military is interested in space exploration and artificial intelligence, so this ETF is grouped under the defense ETF umbrella.
This fund is heavily weighted toward NASDAQ-listed technology companies. Top holdings as I write this include Trimble (TRMB), Iridium Communications (IRDM), Kratos Defense & Security (KTOS), AeroVironment (AVAV) and the ARK 3D Printing ETF (PRNT). These top five holdings make up approximately 35% of total assets. This ETF has a total of 35-55 holdings at any one time.
Remember, this is an actively traded ETF. ARK's professional money managers make investment decisions daily; it isn't just passively tracking an index. This translates into a higher management fee of 0.75%. It's also a smaller fund, with assets of approximately $300M. It has plenty of liquidity, with some 100,000 shares trading hands daily, likely due to the fund's underlying holdings. It's a fund technology investors are more likely to trade rather than buy it for a long-term investment.
Direxion Daily Aerospace & Defense Bull 3x Shares
This ETF is a little different than the rest on this list. This fund's investment objectives seek to replicate the daily investment results, before fees and expenses, of 300% of the performance of the Dow Jones U.S. Select Aerospace & Defense Index.
Here's how it works. This equity fund is a leveraged bet on short-term moves in the defense sector. The fund documents are very clear; its ideal holding period is only one day. It is an incredibly risky fund to hold over the long term since these fund shares have huge volatility swings.
If the underlying holdings have a poor day, watch out. The leverage means a 2% decline in top holdings like RTX Corp, Boeing, or Lockheed Martin translates into a 6% decline in this ETF. There's a huge market risk here. Many professional investors use this ETF as a financial instrument to goose market price returns, usually around earnings season. They know the risks. Most retail investors don't. So, if you want to buy it, ensure you understand the risks.
Another thing making this ETF a non-relevant fund for long-term investors is its high 0.97% expense ratio.
