Investors who bought the Select STOXX Europe Aerospace & Defense ETF (CBOE:EUAD) were buying a clean story: Berlin, Paris, London, and Warsaw pledging generational increases in military spending, and a fund built to own Airbus, Rheinmetall, BAE Systems, Leonardo, and Saab directly. The logic was that if Europe finally rearmed, the continent’s powers would compound. Eighteen months into that trade, the returns have gone the other way. EUAD sits at $41.62, down 1.21% year-to-date and off 3.16% over the past year. The fund that actually captured the rearmament dollars trades on the other side of the Atlantic: the iShares U.S. Aerospace & Defense ETF (CBOE:ITA).
The Case for Owning EUAD
The most direct listed vehicle for the European rearmament theme is this fund. The fund concentrates on Airbus (5.31%), MTU Aero Engines (4.91%), Leonardo (2.96%), BAE Systems (2.64%), Saab (2.48%), Thales (2.40%), Rolls-Royce (2.02%), and Rheinmetall (1.82%). That is a defensible portfolio if the thesis is that NATO’s European members finally spend at 3% of GDP and place orders with local champions. It is also priced for that outcome, trading at a P/E of 40 with a beta of 1.24 and a 0.47% dividend yield.
Where the European Trade Broke Down
The gap between rearmament announcements and rearmament contracts has been wider than headlines suggest. European ministries of defense have leaned heavily on U.S. primes for the equipment they need immediately: F-35s, Patriots, HIMARS, Javelins, munitions, and engines. Germany’s F-35 buy, Poland’s Apache and HIMARS orders, and munition backfills flow directly into the revenue lines of Lockheed Martin, RTX, Boeing, and GE Aerospace, not Rheinmetall or Leonardo. The scoreboard reflects it. EUAD is down over the trailing year, while ITA is up 24.48% and up 9.63% year to date. The theme is the same, but the outcomes have diverged.
Why ITA Cashed the Checks
The U.S. aerospace and defense fund’s book is built for exactly the contract mix Europe has been buying. The top three holdings, General Electric (19.03%), RTX (16.55%), and Boeing (8.91%), are the engine, missile, and airframe suppliers behind the platforms European buyers are actually funding. Adding layers for General Dynamics (4.77%), L3Harris (4.66%), Lockheed Martin (4.58%), and Northrop Grumman (4.58%) on the primes that dominate munitions, radios, fighters, and bombers. The fund holds $13.49 billion in net assets at an expense ratio of 0.38%.
The performance gap is not a one-year artifact. ITA has returned 129.5% over five years and 305.55% over ten years, delivered, while every European conflict cycle since 2016 has ultimately routed procurement through American primes. For a $10,000 position, the trailing 12-month gap between the two funds is roughly $2,764 in favor of ITA. That is the mechanism: the same rearmament story, but with the actual invoices attached.
Readers who want a broader look at the primes driving that contract flow can dig into the 24/7 Wall St. research on defense-adjacent industrial names that benefit from the same procurement cycle.
The Real Tradeoffs
The U.S. aerospace and defense fund is not a free lunch. Concentration is real: GE, RTX, and Boeing alone account for roughly 44.5% of net assets, so a stumble in Boeing production or a commercial aerospace downturn would hit the fund harder than a pure defense basket would. Valuation is similar to the European defense fund at roughly 39x trailing earnings, and the U.S. fund carries commercial-aviation cyclicality that the European fund’s more pure-play defense book does not. Yields are close to a wash, 0.45% on the U.S. fund versus 0.47% on the European fund, so this is a total-return trade, not an income swap.
Making the Switch
In a tax-advantaged account, the swap is mechanical: sell EUAD, buy ITA, no tax consequence. In a taxable account, the math changes. EUAD has traded flat to down for most holders who bought into the 2024 rearmament narrative, so realized gains may be modest or negative, which can actually be useful for tax-loss harvesting against other winners. Anyone sitting on an embedded loss should confirm that the wash-sale rules do not apply if they plan to reload a similar European name later.
What to Watch From Here
The swap logic holds as long as European ministries keep writing checks to U.S. primes faster than they build indigenous capacity. That could change. If Rheinmetall’s shell plants, MBDA’s munitions lines, and Airbus’s fighter programs start absorbing a materially larger share of European budgets, EUAD’s underlying earnings should catch up. Until the contract flow rotates, ITA is the fund that is actually being paid for the rearmament headlines EUAD was named after.
Contact [email protected] for any questions or corrections.
Top Gaining Stocks
Top Losing Stocks