If You Own Vanguard Industrials ETF, Take a Look at This Instead

Investors evaluating the universe of industrial sector exchange-traded funds (ETFs) have plenty of options to consider, but it's hard to go wrong with the Vanguard Industrials ETF (NYSEMKT: VIS).

Not only is this Vanguard sector ETF up nearly 20% year to date, outperforming the S&P 500 along the way, but it also holds a massive basket of 391 stocks, ensuring investors gain broad exposure to the industrials sector. And like so many of its Vanguard peers, this ETF has a low expense ratio. This ETF's annual fee is just 0.09% per year, or $9 on a $10,000 investment.

For investors seeking industrial exposure without the burden of selecting individual stocks, this Vanguard ETF is an excellent choice. For those with higher risk tolerance, there are alternative ways to tap into the industrial sector through ETFs, some of which have the potential to outperform traditional counterparts. Enter the Global X Defense Tech ETF (NYSEMKT: SHLD).

This next-gen defense ETF may be a better bet than standard industrial ETFs. Image source: Getty Images.

Sizing up the Global X Defense Tech ETF

This $4.97 billion Global X ETF isn't as old as traditional industrials ETFs. It came to market in September 2023, but since then, it easily outpaced its old guard rivals because it brings a growth fund feel to a sector that's typically considered a cyclical value destination.

Data by YCharts.

Looked at another way, while standard industrial ETFs feature large allocations to aerospace and defense names such as Boeing and Lockheed Martin, the Global X ETF is a next-generation play on an old sector. In fact, it's not a dedicated industrials ETF because it allocates 14.6% of its weight to technology stocks.

Yes, the ETF shares many holdings with typical industrial ETFs. It also sets itself apart by featuring Palantir Technologies as its largest holding. That story stock isn't a staple of the industrial ETFs of yesteryear. Interestingly, just three ETFs of any variety have larger weights to Palantir than the Global X fund.

Palantir is just one stock, but it underscores crucial points. Warfighting is evolving, and so is how nations arm and defend themselves. National defense spending is becoming increasingly tech-focused, with a focus on artificial intelligence (AI), cybersecurity, and drones, among other trends. More so than its oldest rivals, the Global X ETFs taps into those themes.

This ETF offers regional diversification, too

Regardless of sector, a standard industry ETF, unless otherwise noted, only features exposure to domestic stocks. That's true of the aforementioned Vanguard fund, but when evaluating industrial ETFs, it's a point to consider because many countries outside the U.S. are ramping up defense spending.

The Global X ETF offers access to this theme, as nearly 37% of its holdings are from outside the U.S. The ETF allocates 8% of its portfolio to German equities, which is noteworthy because that country plans to double its defense expenditures over the next five years.

The fund's 5.5% weight to French stocks could be an added perk, as that country's 2027 defense spending is expected to be double the levels seen a decade prior. Bottom line: Defense is an increasingly tech-focused sector, and more countries are recognizing the need to invest in ensuring safety and sovereignty. This Global X ETF isn't granddad's industrial ETF, and that's all right. It may even be a good thing.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Boeing and Palantir Technologies. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.