Navigating Volatility: How Defense ETFs' Dip Offers Long-Run Opportunity

Recent data indicate that major defense exchange-traded funds (ETFs) experienced a decline at the start of November 2025. For instance, the SPDR S&P Aerospace & Defense ETF (XAR) slipped approximately 2.6%, while the iShares U.S. Aerospace & Defense ETF (ITA) experienced a drop of 1.9% over the two consecutive trading sessions.

While this dip reflects some underlying concerns prevailing among defense investors, this momentary pullback could be an ideal time for long-term investors to establish or increase positions in defense-focused ETFs, particularly as fundamental strength in their core holdings remains robust.

After all, aerospace-defense is one among the few industries that typically is more resilient during economic downturns, largely due to its reliance on consistent, long-term government funding and contracts.

What Triggered the Recent Slump?

By design, ETFs encompass a diverse mix of companies, and negative sentiment in one segment, such as commercial aerospace, can temporarily weigh on the entire fund, even if core defense holdings remain resilient. To this end, the recent slump in Defense ETFs can be attributed to a mix of short-term market mechanics and broader industry-specific concerns.

On one hand, broader market concerns related to inflationary pressures, labor shortages, and central bank policy amid the ongoing U.S. government shutdown — the longest in the nation’s history — continue to weigh on the industry. On the other hand, factors like the rising cost of raw materials and supply-chain disruptions, which have only exacerbated in the wake of the higher tariffs, might have created some temporary sell-offs.

Why Defense ETFs Remain a Good Long-term Investment

Despite the recent pullback, defense ETFs remain attractive for long-term investors because of the sustained increase in government defense spending across the globe, technological advancements and geopolitical tensions. As per the International Institute for Strategic Studies’ February 2025 report, global defense spending touched a new record of $2.46 trillion in 2024. This huge spending was mainly due to deteriorating security environments and sharpened threat perceptions, particularly in Europe and the Middle East and North Africa (“MENA”), both of which saw major increases, as did some key Asian countries.

Undoubtedly, this surge in spending reflects the strong pace of aerospace and defense manufacturing, along with increased investments in research and development of more advanced and lethal weapon systems.

Thus, looking ahead, the industry’s outlook remains promising, as nations continue to invest in emerging technologies like hypersonic weapons, autonomous systems, and space defense, thereby boosting demand for major defense primes.

Prominent defense contractors such as Lockheed Martin (LMT), General Dynamics (GD), Boeing (BA), and Northrop Grumman (NOC) exhibited strong earnings performance in their third-quarter results, signaling robust underlying business health supported by solid product demand. Their robust backlog indicates solid revenue growth prospects, thus making the recent ETF dips only a short-lived matter.

Defense ETFs to Buy

Considering the above discussion, the current dip presents an attractive buying opportunity for long-term investors to capitalize on the industry’s growth potential through the following ETFs:

SPDR S&P Aerospace & Defense ETF (XAR)

This fund, with assets under management (AUM) worth $4.71 billion, offers exposure to S&P 500-listed aerospace & defense companies. Its top two holdings constitute AeroVironment (4.63%) and Kratos Defense (4.30%).

XAR has surged 46.5% year to date. The fund charges 35 bps in fees and holds a Zacks ETF Rank #2 (Buy).

Invesco Aerospace & Defense ETF (PPA)

This fund, with net asset value of $155.40 as of Nov. 4, 2025, provides exposure to companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations. Its top three holdings include RTX (8.40%) and Boeing (7.29%).

PPA has gained 36.1% year to date. It charges 58 bps in fees and holds a Zacks ETF Rank #2.

iShares U.S. Aerospace & Defense ETF (ITA)

This fund, with net assets worth $12.37 billion, provides exposure to U.S. companies that manufacture commercial and military aircraft, as well as other defense equipment. Its top three holdings include GE Aerospace (21.45%), RTX (15.53%) and Boeing (7.39%).

ITA has gained 46.6% year to date. The fund charges 38 bps in fees and holds a Zacks ETF Rank #2.

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This article originally published on Zacks Investment Research (zacks.com).

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