Defense Sector ETF Rides Wave of Global Military Spending Surge

The iShares U.S. Aerospace & Defense ETF (ITA) is capitalizing on a powerful confluence of elevated defense budgets and persistent geopolitical instability. While the fund has delivered an exceptional performance exceeding 40% over the past year, its highly concentrated portfolio and recent capital outflows present a nuanced picture for investors.

A Resurgent Defense Investment Thesis

The fundamental outlook for the aerospace and defense sector remains exceptionally strong, underpinned by a worldwide reassessment of national security needs. This strategic shift is most evident in the U.S., where the Department of Defense has put forward a monumental $849.8 billion budget request for 2025. This spending plan prioritizes military modernization and achieving technological dominance, with specific allocations of $29 billion earmarked for shipbuilding and $24.4 billion for missile defense systems.

Demand is not confined to the United States. European nations are concurrently ramping up their own military expenditures, focusing investments on next-generation missile technology, unmanned aerial systems, and space capabilities. This trend is projected to accelerate through 2025, providing sustained tailwinds for the entire industry.

A High-Stakes, Concentrated Portfolio

Although the ITA ETF holds 37 U.S. securities, its performance is overwhelmingly dictated by a small handful of major holdings. The fund’s top ten positions account for a significant 71% to 75.6% of its total assets, creating a high-risk, high-reward scenario that is clearly reflected in recent company-specific news:

• GE Aerospace (21.14%): A standout performer, soaring 85% over twelve months. This rally received a further vote of confidence with the contract extension of CEO Larry Culp through 2027.
• Boeing (9.22%): Facing potential criminal charges from the U.S. Department of Justice related to the 737 MAX crashes, the company is simultaneously engaged in efforts to reacquire supplier Spirit AeroSystems.
• Lockheed Martin (4.12%): Recent sanctions imposed by China on several of its subsidiaries and executives have created new headwinds for the defense giant.

This intense focus means the ETF’s overall health is directly tied to the fortunes of just a few corporations, a double-edged sword in a volatile market.

Should investors sell immediately? Or is it worth buying iShares U.S. Aerospace & Defense ETF?

Performance: Strong Gains Amidst Recent Softness

The ITA’s performance metrics are undeniably robust. The fund has climbed 36.41% year-to-date and posted an impressive 40.27% gain over the preceding twelve months. However, recent data indicates a slight cooling off from these torrid gains:

• One-month change: +0.37% (NAV) / -0.82% (Price Return)
• One-week change: -0.15%
• Three-month change: +8.33%

Trading liquidity remains healthy, with an average daily volume of 541,600 shares. Despite this, the fund experienced outflows of $118.6 million in the week ending September 9, reducing its total assets under management by 1.3%.

Navigating a Competitive Landscape

When measured against competing products like the Invesco Aerospace & Defense ETF (PPA) or the SPDR S&P Aerospace & Defense ETF (XAR), the ITA continues to distinguish itself with superior performance figures. Its strategy of tracking the Dow Jones U.S. Select Aerospace & Defense Index through optimized sampling has proven efficient, evidenced by a minimal tracking error of 0.00% against its net asset value.

The critical question for investors is whether the current geopolitical climate can continue to justify the sector’s elevated valuations. The ETF’s heavy concentration magnifies its vulnerability to company-specific setbacks, as seen with Boeing. Conversely, it remains perfectly positioned to benefit from deep-seated, long-term structural trends that extend far beyond short-term market fluctuations.