SPDR's Aerospace & Defense ETF Took An Unusual Approach That Smoked The S&P 500 With 54% Run

Core Viewpoint - SPDR S&P Aerospace & Defense ETF (XAR) achieved a 54.17% return over the past year by employing an equal-weighting strategy across 41 holdings, contrasting with traditional market-cap weighted funds [1] Group 1: Fund Structure and Performance - XAR allocates capital equally among all holdings, giving smaller companies like Rocket Lab the same weight as larger firms like Boeing, despite significant differences in scale and profitability [1] - The equal-weight methodology allows XAR to capture disproportionate upside during sector rallies, particularly benefiting from increased defense spending [1] - Over the past year, XAR outperformed market-cap weighted alternatives, demonstrating the effectiveness of its structural choice in a favorable market environment for smaller aerospace suppliers [1] Group 2: Risk and Volatility - The fund's focus on smaller companies introduces higher volatility, as evidenced by a recent 4.99% monthly decline when market sentiment shifted negatively [1] - Boeing's negative $3.2 billion EBITDA highlights the portfolio's complexity, as it is weighted equally with more profitable companies like Lockheed Martin, which reported $8.3 billion EBITDA [1] - The equal-weight structure mitigates the risk of any single underperforming company dominating the overall portfolio risk [1] Group 3: Investment Strategy and Considerations - Investors in XAR must accept trade-offs such as concentration risk in a single sector, increased volatility from small-cap exposure, and sensitivity to defense budget cycles [1] - The fund's 0.35% expense ratio is considered reasonable for specialized exposure, making it suitable for tactical allocations by investors confident in the aerospace and defense sector's potential [1] - XAR is positioned as a tactical investment for those who believe smaller innovators will capture significant value in emerging areas like commercial space and autonomous systems [1]