Forget Big Tech’s Rough 2026. Defense Stocks Are the Year’s Breakout, Up ~52% While the S&P Fell

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The iShares U.S. Aerospace & Defense ETF (NYSEARCA:ITA) is the default vehicle for investors seeking exposure to the rearmament trade. It is the largest pure-play aerospace and defense fund, with $13.91 billion in net assets and a 0.38% expense ratio. The case for owning ITA is straightforward: a $900.6B U.S. defense budget, NATO members pushing toward a 5% of GDP defense spending target, and active conflicts from Ukraine to the Middle East have lit up order books at the primes. Yet ITA’s YTD return of 10.73% is essentially tied to the S&P 500’s 10.69% return. For a sector this hot, that gap is the story.

Why ITA Has Lagged Its Own Theme

The pure defense primes that actually map to the rearmament thesis carry smaller weights. Lockheed Martin sits at 4.58%, General Dynamics at 4.77%. Lockheed’s Q1 also delivered a $125 million unfavorable F-16 charge and negative free cash flow of $291 million, a drag that the cap weighting amplified.

The Alternative: SPDR S&P Aerospace & Defense (XAR)

The SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR) is equal-weighted rather than cap-weighted. The sector exposure is the same, but the weighting math differs. XAR is up 17.27% YTD, roughly 6.5 percentage points ahead of ITA. Over one year, the gap widens: 43.49% for XAR versus 32.52% for ITA.

The mechanism behind the gap is direct: equal-weighting caps GE, RTX, and Boeing at roughly the same allocation as smaller pure-play defense names like Kratos, AeroVironment, Howmet, and TransDigm. When the smaller and mid-cap defense suppliers rally on framework agreements and order flow, XAR participates fully. When Boeing drags, XAR feels less of it. Over ten years, XAR has returned 446.61% versus 323.98% for ITA, so the methodology edge is not a single-year quirk.

The Aggressive Cousin: SHLD

The Global X Defense Tech ETF blends U.S. primes with international names like Rheinmetall, BAE Systems, Thales, and Hanwha Aerospace, plus a 5.6% weighting in Palantir. The expense ratio is 0.50%. The fund is down 2.33% YTD after a strong 2025, as European defense names cooled off following a long rally. It belongs in a satellite position for investors who want explicit international and AI-adjacent defense exposure, not as the core replacement for ITA.

The Tradeoffs

Equal-weighting can cut both ways for this fund, and ff GE Aerospace continues to run (already up 45.42% over one year) and Boeing’s turnaround sticks, with a $695B backlog, ITA’s heavier weights will work in its favor. XAR also rebalances quarterly, generating turnover that can matter in taxable accounts. ITA’s larger AUM gives it tighter spreads. And both funds carry the same macro risk, the custom-instructions warning flags: a ceasefire, a budget compromise, or a midterm shift in defense priorities can reverse a momentum trade quickly.

Making the Switch

In a tax-advantaged account, swapping ITA for XAR is mechanical. In a taxable account, embedded gains from ITA’s 10-year 323.98% run may produce a meaningful tax bill, and a partial reallocation, or directing new contributions to XAR, preserves the existing cost basis while shifting the methodology mix.

What to Watch From Here

Investors holding ITA for the rearmament thesis are right about the thesis, but the vehicle is debatable. XAR captures the same sector with a methodology that has paid off across multiple windows. The decision rests on tax costs, account type, and the degree of concentration an investor wants in GE Aerospace, RTX, and Boeing relative to the rest of the defense complex.

The post Forget Big Tech’s Rough 2026. Defense Stocks Are the Year’s Breakout, Up ~52% While the S&P Fell appeared first on 24/7 Wall St..