NATO’s June 2025 Hague Summit produced a target that will reshape the aerospace and defense industry for the next decade. Alliance members are committed to spending 5% of GDP on defense by 2035, split between 3.5% for core military capabilities and 1.5% for resilience and security, covering cyber defense, critical infrastructure, and supply chain innovation. Three US-listed ETFs offer distinct ways to capture that multi-year spending wave: iShares U.S. Aerospace & Defense ETF (CBOE:ITA), SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR), and Invesco Aerospace & Defense ETF (NYSEARCA:PPA).
Each takes a different angle on the same theme. ITA concentrates on mega-cap primes, XAR uses equal weighting to lift mid-tier suppliers, and PPA broadens into defense electronics, IT services, and cybersecurity. The selection logic matters because NATO’s spending split rewards different parts of the value chain in different ways.
Why The Spending Wave Is Different This Time
Global defense outlays reached $2.63 trillion in 2025, and for the first time, every NATO ally met the previous 2% of GDP floor. Poland, the Baltic states, and Greece already spend above 4%, setting a precedent that eastern-flank countries will follow. The Pentagon’s FY 2027 budget request totals $1.45 trillion in budgetary resources, a $440.9 billion, or 44%, increase from the FY 2026 enacted level, building on the historic $1 trillion FY 2026 topline.
The accountability piece separates this commitment from past NATO promises. Allies must submit annual incremental plans demonstrating progress through 2035, which converts a political pledge into a programmable revenue stream for contractors. Goldman Sachs flagged the structural shift in its 2026 outlook, noting that Europe’s defense sector has transitioned from a sluggish, undervalued market to a central focus of government policy and one of the region’s fastest-growing sectors.
ITA: The Mega-Cap Prime Contractor Play
The structure of this portfolio is based on its tracking of the Dow Jones U.S. Select Aerospace and Defense Index with market-cap weighting, which concentrates most of the exposure in the largest contractors. The fund holds 13.49 billion dollars in net assets across 43 positions, with the top names carrying the bulk of the weight. GE Aerospace accounts for 19% of the portfolio, RTX sits at 17%, and Boeing lands near 9%, while General Dynamics, L3Harris, Lockheed Martin, and Northrop Grumman each fall between 4.5% and 4.8%, a lineup that defines the character of defense‑sector exposure and contractor concentration.
NATO’s 3.5% core defense tier funds fighter jets, missile defense, naval platforms, and engines, which the largest US primes sell. When Germany, Poland, or the UK signs a multi-year procurement contract, revenue flows disproportionately to the names that dominate ITA. The fund returned 29% over the past year and currently trades around $239.
That concentration is the central tradeoff. With nearly 45% of assets in three companies, a single bad earnings cycle can drag the entire fund. Investors comfortable with that bet get the lowest expense ratio and deepest liquidity in the category.
XAR: Equal Weighting To Reach The Suppliers
The appeal of this portfolio comes from the way it tracks the S&P Aerospace and Defense Select Industry Index with modified equal weighting, which allows mid-cap suppliers like Curtiss Wright, HEICO, and TransDigm to sit at roughly the same weight as Lockheed Martin. Prime contractors push a meaningful share of every program dollar into specialty manufacturers, electronics suppliers, and component firms, and equal weighting lifts their influence within the basket, creating a profile shaped by supply-chain leverage and index mechanics.
This methodology has paid off during this cycle. XAR returned 33% over the past year, ahead of ITA, and is up 14% year-to-date. The five-year figure sits at 106%. Shares trade around $277.
The fund reaches further into emerging defense technology than ITA’s mega-cap tilt. Names like AeroVironment, Axon Enterprise, Kratos Defense, and Rocket Lab carry weight here that they cannot get in a market-cap structure. NATO’s resilience tier funds drones, autonomous systems, and counter-UAS capabilities, which fall under the mid-cap and small-cap layers.
Equal weighting cuts both ways. The same methodology that lifts suppliers in a rising market accelerates drawdowns when smaller defense names sell off. Position turnover from rebalancing is also higher than ITA’s.
PPA: The Broadest Read On The Defense-Industrial Complex
The identity of this fund comes from its link to the SPADE Defense Index, a benchmark built to capture the full defense ecosystem rather than limiting the exposure to aerospace. The portfolio reaches into defense electronics, government IT contractors such as Booz Allen, Leidos, and L3Harris, and a set of cybersecurity and software vendors that serve federal agencies. Net assets reached $8.01 billion as of April 30, 2026, providing the fund with sufficient scale to anchor its exposure to defense technology and federal services coverage.
The mandate maps directly to NATO’s 1.5% resilience tier, covering cyber defense, civil preparedness, and supply chain innovation. ITA owns very little of that surface area. PPA owns a lot of it. That makes the fund the cleanest single-ticker way to capture the non-traditional half of the 5% commitment, in which European governments are expected to fund the hardening of energy grids, ports, undersea cables, and government networks.
Performance has trailed the other two: PPA returned 24% over the past year with shares around $173. The five-year return of 131% is the highest of the three, suggesting the broader basket compounds well over longer holding periods. Diversification beyond the primes dilutes upside in quarters when traditional contractors lead.
Matching The Fund To The Investor
The first fund suits an investor who expects the largest United States primes to capture most of the NATO procurement cycle and who wants the most liquid, lowest cost vehicle for that view. The heavy weighting in GE Aerospace and RTX is exactly what expresses that conviction.
The second fund suits an investor who sees more upside in the supplier layer than in the primes and is comfortable taking on the additional volatility that comes with that stance. The equal-weight design has delivered the strongest one-year return of the three and reaches emerging defense technology that market cap weighting tends to underrepresent, a profile shaped by supply chain positioning and index construction.
For investors who read NATO’s commitment as a defense-industrial-complex story rather than as pure aerospace, PPA is the closer fit. Cybersecurity, IT services, and electronics carry real weight here, aligning with the resilience tier of the spending framework. A three-way blend or a tilt toward whichever exposure feels most underrepresented in the rest of the portfolio captures the wave from complementary angles.
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