XLI ETF: A Strategic Play on Defense and Infrastructure in a Tense World

The world is in a state of heightened geopolitical tension, with defense budgets soaring and infrastructure projects accelerating. For investors seeking to capitalize on these twin trends, the Industrial Select Sector SPDR® Fund (XLI ETF) offers a compelling solution. By combining exposure to aerospace and defense giants like RTX Corporation (RTX) and Boeing (BA) with infrastructure plays such as Caterpillar (CAT) and Union Pacific (UNP), XLI positions investors to profit from resilient industrial themes. Here's why this ETF deserves a place in portfolios today.

Defense Tailwinds: A Global Arms Race

Geopolitical instability—from Russia's invasion of Ukraine to U.S.-China rivalry—has sparked a renaissance in defense spending. The Stockholm International Peace Research Institute (SIPRI) projects global military expenditure to grow at 3.2% annually through 2030, with the U.S. alone allocating $813 billion in FY2024.

XLI's top holdings directly benefit from this trend. RTX Corporation, which accounts for 4.28% of the fund, supplies advanced missiles, fighter jets, and space systems to governments worldwide. Boeing, at 3.43%, remains a cornerstone of U.S. defense with its F-15EX fighter program and Apache helicopter production. The fund's 25.4% allocation to Aerospace & Defense ensures investors are well-positioned to ride this wave.

Infrastructure Spending: A U.S. Priority

While defense budgets grab headlines, the U.S. government is also pouring money into infrastructure. The Bipartisan Infrastructure Law (2021), allocating $1.2 trillion over five years, has prioritized rail networks, highways, and clean energy projects—sectors where XLI's holdings are deeply embedded.

Union Pacific (3.09% of XLI), a logistics backbone for industrial America, stands to gain as rail freight demand rises. Caterpillar (4.04%), the global leader in construction machinery, is a direct beneficiary of projects like the I-95 expansion and wind farm installations. Meanwhile, Deere (2.9%) profits from agricultural infrastructure upgrades and smart farming tech.

ETF Efficiency: Low Cost, High Liquidity

XLI's 0.08% expense ratio and $11.24 billion in average daily volume make it a cost-effective tool for accessing the industrial sector. Unlike active funds, which charge 1-2% in fees, XLI tracks the Industrial Select Sector Index, offering broad diversification without the burden of stock-picking.

The fund's structure also mitigates single-stock risk. While its top 10 holdings account for 35% of assets, the remaining 65% are spread across 80+ companies in sectors like machinery, electrical equipment, and logistics. This balance allows investors to capture upside while avoiding overexposure to any one firm.

Risks to Consider

No investment is without risk. XLI's performance is tied to economic cycles: a recession could stall infrastructure projects and defense spending. Additionally, the fund's 104 tons CO2e/$M sales carbon intensity may deter ESG-focused investors. Finally, geopolitical shifts—like a sudden de-escalation of tensions—could reduce defense budgets.

Investment Thesis: Buy the Fund's Resilience

Despite these risks, XLI's dual exposure to defense and infrastructure offers a compelling hedge against global instability. With 12.6% year-to-date returns in 2025 and a track record of outperforming broader markets during geopolitical crises, this ETF is a strategic bet on industrial resilience.

Investors should consider adding XLI to portfolios as part of a diversified strategy. Pair it with Treasuries or commodities for balance, and monitor geopolitical headlines for opportunities to rebalance.

In a world where defense spending and infrastructure are non-negotiable priorities, XLI ETF is more than a fund—it's a ticket to the next era of industrial growth.