State Street opened its 2026 Global ETF Outlook with a single sentence that framed an entire year of flows: “Defense was the standout theme of 2025.” The line, buried on page 13 of a report covering a nearly $20 trillion global ETF market, points readers to a narrow trio of U.S.-listed funds that absorbed the bulk of the trade: iShares U.S. Aerospace & Defense ETF (NYSEARCA:ITA), SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR), and Invesco Aerospace & Defense ETF (NYSEARCA:PPA).
The Context State Street Skips
The report attributes the flows to sharply higher European military spending and escalating geopolitical tensions, but it does not show readers how violently the trade priced. From January 2, 2025 through May 4, 2026, ITA returned 48.99%. XAR ran further, posting a 44.35% one-year gain through May 4, while ITA delivered 33.54% and PPA 32.39% over the same window. Volatility confirmed the catalyst: the VIX peaked at 31.05 on March 27, 2026 and held above 25 for most of the month before settling at 16.99 by May 1. State Street flags cyber, defense, energy, and commodities as resilience themes for 2026, which is why the trade has not unwound: ITA sits at $214.33, basically flat year to date, while XAR is up 5.65% and PPA up 5.18%.
How the Three Funds Actually Differ
The three funds take meaningfully different approaches. ITA is market-cap weighted, which concentrates exposure in the prime contractors. XAR uses a modified equal-weight construction, lifting weight toward smaller suppliers and pure-play shipbuilders, which is why it led the pack on the one-year number. PPA carries the broadest basket, blending primes with electronics, IT services, and aerospace component makers. ITA’s net expense ratio is 0.38%, per the iShares fact sheet dated March 30, 2026. The performance gap between equal-weight XAR and cap-weight ITA over twelve months is the cleanest evidence that the 2025 trade rewarded breadth.
What This Means For Sizing
The ten-year Treasury sits at 4.39%, in the 82.7th percentile of the trailing year. That is a real hurdle rate. A defense sleeve large enough to matter (say, 5% to 10% of an equity allocation) gets you policy beta without betting the portfolio on one prime. ITA offers concentration in the names driving headline budget contracts, XAR tilts toward smaller suppliers that have outrun the primes, and PPA carries the widest definition of the theme. State Street called 2025 the standout year. The 2026 question is whether breadth or concentration captures round two.
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