Wars are raging around the world. But it's not the traditional defense contractors investors are paying attention to — highlighting the limitations of some defense ETFs.
Smaller defense companies that focus on surveillance and military supplies, like Kratos Defense and Security Solutions, Leonardo DKR and Transdigm Group, are among the top performers this year in the iShares U.S. Aerospace & Defense ETF, says an Investor's Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith. iShares U.S. Aerospace & Defense is the largest defense ETF with assets of $5.5 billion.
Kratos, a maker of missile defense systems, is up more than 80% this year. In contrast, defense giant Lockheed Martin has seen its shares sink more than 8% in that time. In fact, the top performer in the iShares U.S. Aerospace & Defense ETF is a maker of civilian electric-powered air taxis, not associated with war: Archer Aviation.
Languishing shares of traditional defense companies this year show investors foresee different tactics playing out in current conflicts and tensions not heating up enough to spark a larger war.
"Equities have historically held up well during geopolitical shocks, including wars and other military conflicts going back decades, with the average recovery taking roughly two months. Even the market recovery from Sept. 11 took only 31 days," said George Smith, portfolio strategist for LPL Financial in a note to clients.
Where Aerospace Stocks Are Taking Off
Archer's outperformance in the largest aerospace ETF highlights that investors are looking for innovation. Archer Aviation is developing a sort of Tesla of the sky, and shares are up 243% this year.
The company's helicopter-like aircraft take off horizontally. Archer is working on transportation that gets people to the airport. It's still a speculative play, with the company seen losing money until at least 2027. Nonetheless, Archer is a holding for several affiliated ETFs. But it's only a 0.3% position in iShares U.S. Aerospace & Defense. It's a 4.3% position in ARK Autonomous Technology & Robotics ETF, though, says ETF.com.
Kratos Defense and Leonardo DRS, both involved in making surveillance-focused gear, are also outperforming. Their shares are up 81% and 62%, respectively this year. But they, too, are relatively small positions in iShares U.S. Aerospace & Defense at just 0.7% and 0.3%.
Parsing Between Defense ETFs
If you want exposure to the defense and aerospace industry, you need to be mindful of what you're buying with ETFs.
"The aerospace and defense industry is the second largest in the industrials sector," said Todd Rosenbluth, director of research at Vetta Fi. The Industrials Select Sector SPDR has 20% of assets in the industry, second only behind machinery, he says.
But the iShares U.S. Aerospace & Defense ETF "is a more concentrated approach focused on just companies within the industry," Rosenbluth said. It's heavily focused on traditional defense contractors with shares lagging the S&P 500. Boeing and RTX were each recently 17% of the assets, with General Dynamics, Lockheed Martin, and Transdigm Group each about 5% of assets.
Instead, the $1.7 billion-in-assets SPDR S&P Aerospace & Defense ETF weights all its holdings equally. "Each stock is 3% of assets at rebalance but smaller-cap winners like Huntington Ingalls Industries and Spirit AeroSystems can be of greater size along with the large caps like General Dynamics and Transdigm," Rosenbluth said. This weighting to smaller firms is why the ETF is up 14.2% this year, versus 3.9% for iShares U.S. Aerospace & Defense.
But due to heavy concentrations in traditional defense companies, none of these ETFs are doing all that well. iShares U.S. Aerospace & Defense and SPDR S&P Aerospace & Defense ETF are both lagging the S&P 500.
Top Stocks In iShares U.S. Aerospace & Defense
This year so far
| Company | Ticker | YTD |
|---|---|---|
| Archer Aviation | 243.05% | |
| Kratos Defense & Security Solutions | 81.27 | |
| Smith & Wesson Brands | 66.53 | |
| Leonardo DRS | 62.13 | |
| TransDigm Group | 57.90 | |
| AAR | 49.58 | |
| AeroVironment | 49.57 | |
| Woodward | 39.59 | |
| Axon Enterprise | 33.07 | |
| Howmet Aerospace | 31.63 |
