The Industry Group of the Week: Aerospace & Defense (XAR ETF)

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Earlier this weekend, we shared a broad market analysis of global asset class, US sector, and American industry group ETFs. Out of 21 US-traded sub-sectors we track, the top performing is the US Aerospace and Defense (XAR) ETF.

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The SPDR S&P Aerospace & Defense ETF (XAR) aims to track the total return of the S&P Aerospace & Defense Select Industry Index—before fees—by using a modified equal-weight methodology. This approach provides diversified exposure across large-, mid-, and small-cap aerospace and defense companies, avoiding the concentration risk typical of market-cap-weighted sector ETFs.

By equal-weighting its holdings, XAR offers investors a more balanced way to capture industry trends and geopolitical tailwinds. It’s a tactical tool for those looking to overweight the aerospace and defense sector without putting too many eggs in the biggest players’ baskets.

Currently, XAR appears to be in the early stages of a bullish trend reversal, as indicated by its Green-Green QuickView chart. We’re taking a cautious approach—dollar-cost averaging into select stocks to build our position gradually. For trend followers, a stop loss at $157 provides a defined exit for those willing to "climb the wall of worry" and ride XAR’s 40-day EMA, targeting the 3- to 9-month bullish trend potential signaled by the green long-term market forecast background.

That said, risks remain elevated. Under our risk management rules, that means limiting exposure to 30% of a typical position size—a far cry from the full allocations we’d consider when markets are in full "good times rolling" mode. The green 40-day EMA confirms an intermediate bullish uptrend, further supported by a bullish intermediate market forecast and strengthening buying pressure.

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Fundamental Forces Driving Aerospace & Defense ETF Strength

While the SPDR S&P Aerospace & Defense ETF (XAR) has flashed bullish signals on the technical front, a closer look reveals powerful fundamental tailwinds fueling the broader Aerospace & Defense (A&D) sector.

A perfect storm of global trends is boosting the sector’s prospects—from heightened geopolitical tensions driving defense budgets to a commercial aerospace rebound constrained by production bottlenecks, all while technological innovation reshapes the industry’s future. Thanks to XAR's modified equal-weight index structure, investors gain exposure not only to the industry giants but also to innovative mid- and small-cap companies poised to benefit from these shifts.

Here are the core drivers behind A&D’s current strength—and by extension, XAR’s momentum:

1. Surging Global Defense Spending
   Ongoing conflicts and rising strategic rivalries are pushing nations to allocate record-breaking defense budgets. This is creating sustained demand for military hardware, advanced technologies, and defense services—fueling growth across the sector.

2. Commercial Aerospace Recovery—with a Twist
   Passenger air travel has roared back, surpassing pre-pandemic levels. But major manufacturers are grappling with supply chain disruptions and production challenges, opening doors for suppliers and the maintenance, repair, and overhaul (MRO) market. While a potential recession or trade tariffs could temper this recovery, for now, these pressures create opportunities beneath the surface.

3. Technological Transformation
   Breakthroughs in AI, autonomous systems, hypersonic propulsion, and the rapidly expanding space sector are redefining what's possible in A&D. This wave of innovation is attracting significant investment—and it’s exactly where we’re focusing our own allocation within the sector.

Finally, XAR’s portfolio design—balancing exposure across company sizes—ensures investors aren’t just riding the coattails of defense giants landing mega-contracts. It captures the full spectrum of growth, from headline military deals to cutting-edge tech disruptors and niche players benefiting from black budget spending and beyond.

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