President Donald Trump's moves to rip up the world's military alliances are creating ways for investors to profit in S&P 500 stocks using ETFs.
Six of the eight largest defense and aerospace ETFs, including iShares U.S. Aerospace & Defense, Invesco Aerospace & Defense and SPDR S&P Aerospace & Defense, are outperforming the S&P 500 this year, says an Investor's Business Daily analysis of data from ETFdb and MarketSurge. And the entire group of eight ETFs is up an average of nearly 7%, while the S&P 500 is down 3% this year so far, says S&P Global Market Intelligence.
"The rise in global military expenditures has driven strong performance in defense stocks," said Taylor Krystkowiak, vice president and investment strategist at Themes ETFs.
A New World Order?
Trump has made it clear he's no longer interested in protecting many of the U.S.' allies. And he is expecting countries, especially in Europe, to spend more on their own defense.
And that's prompting major shifts. NATO members excluding the U.S. are forecast to spend $380 billion on defense this year. And 23 countries are positioned to spend 2% of their GDP on defense, an all-time high, Krystkowiak says. The result is an expected boom in defense spending — already showing up in the shares of the defense ETFs.
U.S. defense stocks are in the major indexes, but are not a major component. "Investors have modest exposure to aerospace and defense companies in a broad U.S. equity market ETF tied to the S&P 500 or the Russell 1000 indexes," said Todd Rosenbluth of TMX VettaFi. "The industry is part of the industrial sector but is relatively small compared to the information technology sector."
ETFs can fortify portfolios' exposure to defense, though. But not all defense and aerospace ETFs are alike.
Picking The Top Defense ETFs
The biggest winner so far is the $1.2 billion-in-assets Global X Defense Tech ETF. Shares are up nearly 27% this year, mainly due to the exposure to the wave of European spending.
The ETF owns European defense giants like Germany's Rheinmetall in addition to U.S. firms. Global X Defense Tech holds an 8.7% position in Rheinmetall. The German company provides a wide range of defense supplies ranging from munition to armored vehicles. Shares have more than doubled in value this year. Analysts think the company will make $31.84 a share this year, up nearly 70% from 2024.
Another large European holding in the fund is France's Thales, which trades on the Euronext Paris exchange. It, too, makes a variety of defense products ranging from flight decks to drones. It's a 6.2% position in the ETF. Shares are up more than 80% this year.
But Global X Defense Tech also holds shares of U.S. defense stocks like Palantir Technologies. The maker of defense software is up more than 20% this year. And it's a 9.7% position in the fund — making it the largest holding.
Other Options To Choose From
IShares U.S. Aerospace & Defense, Invesco Aerospace & Defense and SPDR S&P Aerospace & Defense are the largest defense ETFs by assets. But they take different approaches.
IShares U.S. Aerospace & Defense and Invesco Aerospace & Defense "are more concentrated in large cap stocks like Boeing and Lockheed Martin," Rosenbluth said. Boeing is the third-largest position in iShares U.S. Aerospace & Defense at roughly 10%, says Morningstar.
SPDR S&P Aerospace & Defense takes a slightly different tactic. It holds smaller defense stocks like Archer Aviation and Rocket Lab USA, too. "There are more targeted industry ETFs that can be used to augment diversified funds. However there are differences between them," Rosenbluth said.
Largest Defense ETFs
Most top the S&P 500 this year so far
| ETF | Symbol | Assets ($ billions) | YTD ch. |
|---|---|---|---|
| iShares U.S. Aerospace & Defense | ITA | $6.5 | 8.0% |
| Invesco Aerospace & Defense | PPA | 4.7 | 4.0% |
| SPDR S&P Aerospace & Defense | XAR | 2.7 | 0.5% |
| Global X Defense Tech | SHLD | 1.2 | 26.8% |
| ARK Space Exploration & Innovation | ARKX | 0.3 | -3.5% |
| Direxion Daily Aerospace & Defense Bull 3X | DFEN | 0.2 | 20.4% |
| SPDR S&P Kensho Future Security | FITE | 0.09 | -2.5% |
| U.S. Global Technology and Aerospace & Defense | WAR | 0.003 | 0.8% |
