ETF Comparison: SPDR S&P Aerospace & Defense ETF (XAR) Versus Invesco Aerospace & Defense ETF (PPA)

XAR vs PPA: Total cost of ownership

When it comes to expense ratios, XAR takes a clear lead at 0.35%. This is the standard pricing State Street SPDR has set for its industry-specific ETFs. On the other hand, Invesco charges 0.57% for PPA. For a $10,000 investment, this translates to $35 annually for XAR versus $57 for PPA—a significant difference.

While XAR already stands out on fees, what about implicit costs? When trading these ETFs, PPA shows slightly better liquidity, with a 30-day median bid-ask spread of 0.035% compared to XAR’s 0.041%.

Verdict: XAR wins by a mile. Its lower expense ratio more than compensates for the marginally higher trading costs, making it the more cost-effective choice overall.

XAR vs PPA: Methodology and holdings

Both ETFs take a passive approach to tracking aerospace and defense stocks via their respective benchmark indexes, but their criteria and weighting methodologies differ significantly.

XAR

tracks the S&P Aerospace & Defense Select Industry Index, which uses an equal-weighted methodology. This approach gives higher weight to smaller and mid-cap companies, many of which are more focused on the aerospace side of the sector. XAR holds 34 stocks.

PPA

, on the other hand, tracks the SPADE Defense Index, which includes 54 holdings with historical data dating back to December 30, 1997. This index covers not just traditional aerospace and defense but also services, IT, and cyber activities. It employs a modified market-cap-weighted methodology called the SPADE Index TrueCap methodology.

This approach adjusts the weight of diversified conglomerates by isolating the relevant business activity within the defense, aerospace, homeland security, or space sectors as if it were a standalone entity. It also highlights “systematically important” firms whose elimination would significantly impact the operations or capabilities of the U.S. Department of Defense.

Both ETFs have similar levels of top-heaviness, with around 69% of their total weight concentrated in the top 15 holdings. However, the composition of these top holdings differs.

XAR’s equal-weight strategy means its top holdings are often firms that have performed well between rebalances, emphasizing smaller and mid-cap aerospace names. In contrast, PPA leans heavily on the largest defense contractors, including Raytheon, Boeing, Lockheed Martin, General Dynamics, Northrop Grumman, Honeywell, and L3Harris.

Verdict: In my opinion, PPA wins in this category because it more accurately reflects the true scale of the U.S. military-industrial complex.

XAR vs PPA: Risk and return

Both ETFs have delivered strong double-digit returns in recent years and attracted significant inflows, but PPA

edges out XAR

XAR

-1.96%

with higher returns across three-year, one-year, and year-to-date timeframes.

Over the long term, PPA also outperformed, delivering a 17.47% compound annual growth rate (CAGR) compared to XAR’s 17.06%. It achieved better risk-adjusted returns as well, with a Sharpe ratio of 0.87 versus XAR’s 0.77.

Why? Personally, I think XAR’s equal-weight methodology and frequent rebalances prevent winners from running and reduce exposure to large-cap defense contractors, which have seen the biggest gains during recent conflicts.

In terms of risk, PPA is the clear lower-risk option. It has lower volatility and shorter, shallower drawdowns. XAR’s equal-weighting skews it toward more volatile small- and mid-cap stocks, while PPA’s focus on large contractors with billions in backlogs provides more stability.

Verdict: PPA wins here, offering higher returns with lower risk, making it the more dependable choice for aerospace and defense exposure.

This article is for informational purposes only and does not in any way constitute investment advice. The author may express their own opinions, which may not represent the opinions of ETF Central or its affiliated partners. It is essential that you seek advice from a registered financial professional prior to making any investment decisions.