Defense ETF Battle: XAR vs ITA - Which Wins for 2027?

The iShares U.S. Aerospace & Defense ETF (ITA) and State Street SPDR S&P Aerospace & Defense ETF (XAR) both offer exposure to military defense and commercial aviation, but their construction differs dramatically. ITA is market-cap-weighted, with its top three holdings—GE Aerospace, RTX, and Boeing—accounting for nearly 45% of the portfolio. In contrast, XAR uses a modified equal-weighting strategy, spreading assets more evenly across 50 stocks, with its largest position at just 3.57%.

This structural difference creates distinct risk profiles. ITA's concentration means outsize exposure to industry giants, which can boost returns when those leaders outperform but amplify losses when they stumble. XAR's balanced approach reduces single-stock risk and provides more exposure to mid-cap innovators and specialized manufacturers. The funds also differ slightly in cost, with XAR charging 0.35% versus ITA's 0.37%.

Performance over the past year reflects these dynamics: XAR returned -6.9% while ITA returned -0.3%, as ITA's large-cap holdings held up better in a challenging environment. However, looking ahead to 2027, the sustainability of defense spending and the pace of commercial aerospace recovery will likely favor a more diversified approach.

The choice between ITA and XAR hinges on an investor's view of concentration risk and the outlook for defense spending. ITA's heavy weighting in GE Aerospace, RTX, and Boeing means it is essentially a bet on these three companies. If defense budgets remain robust and commercial aviation demand continues to recover, these giants could thrive. But any setback—such as a program delay, cost overrun, or budget cut—could disproportionately hurt ITA.

XAR's equal-weight strategy mitigates this risk by giving more weight to a broader set of companies, including mid-caps like Textron and TransDigm. This diversification could pay off if smaller defense contractors benefit from niche technologies or if the sector rotation favors value over size. However, XAR's higher beta (1.07 vs. 0.78) means it may be more volatile in the short term.

Ultimately, the winner will depend on the market environment. In a bull market for defense, ITA's concentrated bet could outperform. But for long-term investors seeking balanced exposure, XAR's design offers a smoother ride and greater potential to capture emerging trends across the sector.