Aerospace & Defense ETF Nears Peak on Budget and Tech Surge

SPDR® S&P Aerospace & Defense ETF US78464A6313

The SPDR® S&P Aerospace & Defense ETF (XAR) is trading within striking distance of its all-time high, having delivered a remarkable 72.48% return over the past year. This surge is fueled by a proposed defense budget of unprecedented scale and the accelerating convergence of space and defense technologies. Investors are now questioning whether this momentum can be sustained.

Currently priced at $292.74, the fund sits just below its 52-week peak of $294.45. The market is pricing in significant future growth, assigning the portfolio a price-to-earnings (P/E) ratio of 31.39. For investors, the fund remains accessible with a relatively low expense ratio of 0.35%.

When compared to peers, XAR’s strategy stands out. It offers greater exposure to mid-cap space and technology firms at a lower cost than the Invesco Aerospace & Defense ETF (PPA). The Global X Defense Tech ETF (SHLD), in contrast, takes a more concentrated approach on pure-play defense technology such as artificial intelligence and cybersecurity.

Dual Engines of Growth: Budget and Innovation

Two powerful, concrete trends are propelling the sector forward:

• A Historic Budget Proposal: The defense sector received a major catalyst with President Trump's proposal for a $1.5 trillion defense budget for fiscal year 2027. This figure represents a staggering 66.4% increase over the 2026 budget, with focused spending on next-generation capabilities including missile defense and space dominance.
• The Space-Defense Nexus: The line between commercial space ventures and military technology is rapidly disappearing. A prime example occurred on January 16, 2026, when the US Missile Defense Agency awarded contracts under the $151 billion SHIELD program. Companies with heavy space exposure saw their share prices jump immediately on the news.

Investment Approach: The Power of Equal Weighting

The XAR ETF employs a modified equal-weight strategy, a defining difference from market-cap-weighted competitors. This methodology prevents the fund from being dominated by industry giants like RTX or Lockheed Martin. Instead, it assigns higher weightings to mid-cap growth companies, which are often more nimble in capturing opportunities within specialized high-tech niches.

Key holdings that benefit from this structure include Karman Space & Defense, Kratos Defense & Security Solutions, and Rocket Lab USA. The latter company recently garnered an "Overweight" rating from Morgan Stanley analysts, who set a price target of $105. This upgrade followed Rocket Lab's December 2025 contract win from the Space Development Agency, valued at $816 million.

Outlook: Critical Catalysts on the Horizon

The ETF's near-term trajectory hinges on several upcoming events. From a technical perspective, XAR is approaching the psychologically significant $300 level. Meanwhile, certain individual components, including Rocket Lab, are trading in overbought territory, suggesting a period of short-term consolidation is possible.

Substantial price movements are expected around the upcoming earnings reports from major holdings. Rocket Lab is scheduled to report on February 26, 2026, followed by AST SpaceMobile on March 2, 2026. Positive commentary regarding government contract pipelines will be crucial to justify current valuations. Furthermore, the monumental budget proposal must navigate Congressional approval; any sign of bipartisan support would be interpreted as a strong buy signal for the entire sector.