The Aerospace ETF Wall Street Overlooks: Why XAR’s Smaller Holdings Are Outrunning the Giants

NATO’s European allies and Canada increased their defense outlays by roughly 20% in 2025 alone. For investors capturing that structural shift, the question is how to own aerospace and defense. SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR) offers a distinctive answer.

Equal-Weight Exposure Across the Defense Supply Chain

Most sector ETFs concentrate capital in the largest companies. XAR does not. It tracks the S&P Aerospace & Defense Select Industry Index using equal-weight methodology, meaning every one of its 41 positions receives roughly the same allocation. The top holding, NYSE:BWXT BWX Technologies, carries just about 3% of the fund. NYSE:LMT Lockheed Martin and NYSE:BA Boeing each sit at approximately 3%, the same weight as NASDAQ:RKLB Rocket Lab and AeroVironment.

This design choice is the fund’s defining feature. Investors get broad coverage of defense primes, mid-tier suppliers, space launch companies, and drone manufacturers in a single vehicle. The fund makes an explicit bet that smaller and mid-sized players will contribute meaningfully to returns, not just the giants.

The return engine is straightforward: underlying business cash flows and earnings growth across the aerospace and defense supply chain. There are no options overlays, no leverage, and no synthetic exposures. The fund carries no leverage and a 0.4% expense ratio, which is reasonable for a specialized sector mandate. Income is minimal, with a dividend yield of 0.1%, so returns should come almost entirely from price appreciation.

Performance and Current Positioning

XAR’s equal-weight structure has delivered. Over the past year, the fund returned nearly 79%, driven by surging defense budgets, geopolitical tensions, and renewed investor appetite for the sector. Over five years, the fund is up about 108%. Over ten years, it has returned roughly 439%, reflecting both the sector’s long-term growth and the structural tailwind of rising global defense budgets.

Year-to-date in 2026, XAR is up nearly 8%. The fund pulled back about 7% over the past month as broader market uncertainty weighed on risk assets. The VIX is near the top of its 12-month range, around the 91st percentile, which creates short-term pressure but historically draws capital toward defense holdings as investors seek geopolitically resilient positions.

Three Key Tradeoffs

1. Single-sector concentration with no diversification buffer. XAR allocates 97% of its portfolio to industrials with no meaningful exposure to any other sector. If defense budgets contract, procurement cycles slow, or political shifts reduce military spending, the entire fund absorbs the hit. This is a deliberate sector bet requiring conviction and sizing discipline.
2. Equal weighting amplifies small-cap volatility. Giving Rocket Lab and Intuitive Machines the same weight as General Dynamics means the fund diverges sharply from a market-cap weighted alternative during risk-off periods. Smaller names sell off harder and faster. Investors accept that volatility in exchange for upside potential when smaller innovators outperform the primes.
3. Geopolitical and policy risk cuts both ways. Defense spending is driven by government decisions, not consumer demand. Budget negotiations, administration priorities, and treaty obligations can shift contractor revenue quickly. The fund’s low portfolio turnover of 0.35 means holdings are not actively managed in response to policy changes, so investors bear that risk directly.

On Reddit’s r/ETFs, one investor captured the appeal: “XAR has been my aerospace and defense ETF of choice. It has been fantastic.” That sentiment reflects the fund’s recent run and why equal weighting resonates with investors who believe the next decade of defense innovation will come from smaller companies, not just the established primes.

XAR offers concentrated, equal-weight exposure to the full aerospace and defense supply chain, with the tradeoff that a single bad policy cycle or geopolitical reversal could produce sharp drawdowns with no other sector to absorb the loss.