While most investors are chasing AI and crypto, the smart money has quietly moved into a sector that's delivering huge returns. We're talking about 82% gains in under a year while the market struggled to break even.
The defense sector isn't just having a moment; it's entering what analysts are calling a "supercycle" that could run for the next decade.
The Numbers Don’t Lie
Global military spending exploded to $2.7 trillion in 2024, the biggest surge since WWII ended. But this isn't some temporary blip driven by a single conflict.
This is a fundamental shift in how nations think about security.
NATO just made a commitment: 5% of GDP on defense by 2035.
They're more than doubling their previous target, creating a $4.2 trillion annual market by the mid-2030s.
Think about what that means for defense contractors.
Defense ETFs to Focus On
Let's cut to the chase. Here are the seven funds that investors are using to ride this wave.
Global X Defense Tech ETF (SHLD)
YTD Return: +82.4%
Why it's crushing it: Pure play on defense tech, heavy in AI and cybersecurity
The risk: Higher volatility, newer fund
Insight: If you want maximum upside and can handle the swings, this is your play
Select STOXX Europe Aerospace & Defense ETF (EUAD)
YTD Return: +78.0%
Why it's soaring: Europe is finally getting serious about defending itself
The catalyst: EU targeting €800 billion in defense investments by 2030
Insight: Germany alone is committing over $100 billion annually
Invesco Aerospace & Defense ETF (PPA)
YTD Return: +61.7%
Assets: $6.2 billion
Insight: Nearly 20 years of track record, balanced exposure
The play: Blue-chip defense contractors with proven execution
Themes Transatlantic Defense ETF (NATO)
YTD Return: +44.2% (launched October 2024)
The angle: Direct exposure to NATO burden-sharing
Why it matters: As the US pulls back, allies must step up
Risk factor: Newer fund, smaller size
SPDR S&P Aerospace & Defense ETF (XAR)
YTD Return: +42.9%
The difference: Equal-weight methodology reduces concentration risk
Why it matters: Mid-cap component manufacturers benefiting from both defense and commercial aviation
iShares US Aerospace & Defense ETF (ITA)
YTD Return: +37.6%
Assets: $9.4 billion (largest in the sector)
Holdings: GE Aerospace, RTX, Boeing
Why it works: Liquid, established, institutional favorite
SPDR S&P Kensho Future Security ETF (FITE)
YTD Return: +34.5%
Focus: Cybersecurity, drones, space systems, AI-enabled platforms
The Pentagon angle: $1.8 billion AI budget (up 63.6%)
For investors who want exposure to the future of warfare
Geopolitical Catalysts
Multiple global tensions are driving massive defense spending increases.
NATO's Big Commitment: Allied nations must hit 5% of GDP on defense by 2035—that's $4.2 trillion annually and nearly triple current European spending levels.
Asia-Pacific Arms Race: Taiwan boosted defense spending 23% to $31.3 billion as China ramps up military pressure. Other regional countries are following with major increases.
Europe Goes Independent: EU nations want less reliance on U.S. protection, driving 6.8% annual defense budget growth through 2035—the fastest since WWII.
Middle East Buildup: Gulf states are spending $100+ billion yearly on missile defense and advanced weapons due to regional instability.
All these factors together create a perfect storm of demand that defense contractors can count on for years to come.
Investment Strategy
For Maximum Growth: SHLD and EUAD offer the highest potential. These are for investors who believe the defense tech revolution is just getting started.
For Stability: ITA and PPA provide exposure to established contractors with decades of government relationships.
For Diversification: XAR's equal-weight approach captures mid-cap outperformance while NATO provides pure transatlantic exposure.
For the Future: FITE offers differentiated exposure to cybersecurity and emerging threats. This is where defense spending is heading.
Risk Factors
Let's be honest, nothing goes straight up forever.
Valuation Concerns: Some names are trading at premium multiples. RTX is at 44.4x trailing P/E, well above historical norms.
Political Risk: Election cycles can shift priorities, though national security typically transcends party lines.
Supply Chain Constraints: The same chip shortages are affecting missile systems. This limits how fast contractors can scale production.
Technological Disruption: Today's cutting-edge weapon could be tomorrow's museum piece if warfare evolves faster than expected.
Don’t Miss This Opportunity
The defense supercycle isn't speculation; it's happening right now. With global tensions rising, new military tech emerging, and governments pledging massive budget increases, defense stocks could be the most reliable bet for the next ten years.
Want big gains? SHLD and EUAD have the highest upside, but expect wild price swings
Playing it safe? Stick with ITA and PPA—these funds hold rock-solid defense giants with decades of steady profits
Looking for something different? Try XAR for balanced exposure or NATO for companies on both sides of the Atlantic
Remember: This analysis is for educational purposes and shouldn't be considered personalized investment advice. Defense stocks can be volatile, and past performance doesn't guarantee future results. Always consult with a financial advisor before making investment decisions, especially in sector-specific ETFs.
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