Shares of the XAR aerospace and defense ETF plunged 3.0% to $258.56 on Thursday as investors fled risk assets after Iran flatly rejected a U.S. ceasefire plan and the broader conflict showed no signs of ending. U.S. stocks were firmly lower as Tehran rejected the push for ceasefire talks, dimming expectations of a near end to the war and supporting positions that energy exports from the Strait of Hormuz will remain halted. XAR's drop roughly tripled the S&P 500's ~1% decline, exposing the ETF's vulnerability to macro shocks despite the sector's long-term spending tailwinds.
Iran's Defiance Keeps the Strait Shut and Oil Above $100 — By Thursday morning, oil had reached $105.85 per barrel on the Brent benchmark, up $6.10 from the day before and about $32 above its price a year earlier.
Iran's attacks on regional energy infrastructure, along with its restrictions on the strait, have sent oil prices skyrocketing. For industrial stocks like those in XAR, costlier fuel raises input expenses for manufacturers, squeezes airline-adjacent holdings, and drags on economic growth expectations — all of which hit the fund harder than the broad market.
A War-Driven Selloff Masks a Historic Defense Spending Boom — Trump has announced he intends to request a $1.5 trillion defense budget for fiscal year 2027 , and the FY2026 proposal already represents a 13% increase, pushing defense spending over $1 trillion for the first time.
Global defense spending is expected to hit $2.6 trillion this year, an 8.1% increase over 2025. XAR's top holdings — Lockheed Martin (4.18%), Northrop Grumman (3.97%), and Huntington Ingalls (3.94%) — are direct beneficiaries. The paradox: the same war punishing the ETF today creates the procurement demand that should drive revenue growth for its holdings for years.
Volatility Is the Price of Admission for This Sector — XAR has swung between a 52-week low of $137.09 and a high of $295.39 , a staggering 115% range reflecting the geopolitical whiplash. The fund's 50-day moving average sits at $277.02 , meaning today's price is now roughly 7% below that trend line — a technical signal the selloff may be overstretched.
The Inflation Threat Could Outlast the War — The OECD now forecasts U.S. inflation at 4.2% for 2026, a sharp step up from its prior projection of 2.8% , driven by energy costs from the Iran conflict. If the Fed is forced to keep rates higher for longer, it raises borrowing costs across the industrial sector and compresses the valuations investors are willing to pay. For XAR, trading at a steep price-to-earnings ratio of 61.92 , that math cuts both ways: enormous long-term demand, but a premium that could deflate fast if the economic backdrop worsens.