Global Defense Spending Boom: Investment Opportunities in Defense Sector ETFs

Global defense expenditures have reached unprecedented levels, with worldwide military spending climbing to $2.72 trillion in 2024—a 9.4% increase from the previous year and the largest annual surge since the Cold War period, according to the Stockholm International Peace Research Institute (SIPRI). This accelerating investment reflects intensifying geopolitical risks and evolving security priorities worldwide. For investors seeking exposure to this expanding sector, defense sector etfs have emerged as compelling vehicles to capture growth across aerospace and military-related companies.

The Global Defense Spending Surge Reshapes Market Dynamics

The concentration of military budgets remains heavily skewed toward major powers. The United States, China, Russia, Germany, and India collectively account for 60% of global defense outlays, with U.S. spending alone reaching $997 billion—representing 37% of worldwide defense expenditures and reflecting a 5.7% year-over-year growth rate. This spending resilience is expected to persist in coming years, driven by sustained geopolitical tensions, government defense commitments, and national security mandates that transcend typical economic cycles.

Europe has notably accelerated its military investments. Germany’s defense budget surged 28% to $88.5 billion in 2024, positioning it as the world’s fourth-largest military spender. Sweden, entering its first year as a NATO member, increased defense spending by 34% to $12 billion, while Poland raised allocations by 31% to $38 billion. Goldman Sachs Research projects that European Union member states will progressively expand annual defense spending by approximately €80 billion ($84 billion) to reach 2.4% of GDP by 2027, up from 1.8% in 2024.

Aerospace Companies Post Robust Earnings Performance

Despite broad earnings pressure across most S&P 500 sectors due to tariff-related headwinds, the aerospace and defense segment has demonstrated remarkable resilience. Q2 earnings estimates declined for 15 of 16 Zacks sectors; the aerospace sector alone bucked this trend with upward estimate revisions. This momentum was evident in Q1 2025 results, when aerospace companies delivered 23.2% earnings growth alongside an impressive 85.7% beat ratio, though revenue growth remained modest at 0.2% with a 71.4% beat ratio.

The Zacks Aerospace-Defense industry currently holds the #50 Zacks Industry Rank, placing it in the top 20% of over 250 tracked industries. The broader aerospace sector commands the #1 Zacks Sector Rank, underscoring strong analyst sentiment and investor positioning in the space.

Strategic Factors Driving Defense Investment Appetite

Russia’s invasion of Ukraine fundamentally reshaped European defense procurement strategies. European nations significantly increased purchases of military equipment from non-EU suppliers, while larger EU members continued leveraging domestic defense contractors. Although Europe’s share of global arms production declined between 2008 and 2016, it has recovered steadily since then. All 32 NATO members elevated defense budgets in 2024, with 18 nations meeting or exceeding the alliance’s 2% of GDP spending target. Recent pressure from U.S. leadership, including proposals to raise NATO defense commitments to 5% of GDP, has further accelerated spending commitments across member nations.

Defense Sector ETFs: A Structured Entry Point

The expanding defense budget environment and strong aerospace earnings trajectory have fueled investor interest in defense sector etfs as efficient portfolio vehicles. These funds offer diversified exposure to hundreds of companies engaged in defense, aerospace, and related technologies without requiring individual stock selection.

iShares U.S. Aerospace & Defense ETF (ITA) tracks the Dow Jones U.S. Select Aerospace & Defense Index with a 40 basis point fee. This fund captures broad U.S. market aerospace and defense exposure.

Invesco Aerospace & Defense ETF (PPA) follows the SPADE Defense Index, comprising approximately 50 U.S. companies principally engaged in defense, military, homeland security, and space operations research, development, and manufacturing. The fund charges 57 basis points.

SPDR S&P Aerospace & Defense ETF (XAR) provides exposure through the S&P Aerospace & Defense Select Industry Index representing the aerospace and defense sub-industry of the S&P Total Stock Market Index. Fee: 35 basis points.

Global X Defense Tech ETF (SHLD) delivers concentrated exposure to defense technology companies, with significant weightings to the United States (51.3%), Britain (11.8%), and Germany (10%). The fund charges 50 basis points.

Select STOXX Europe Aerospace & Defense ETF (EUAD) tracks the STOXX Europe Total Market Aerospace & Defense Index, providing European-focused aerospace and defense exposure at 50 basis points.

First Trust Indxx Aerospace & Defense ETF (MISL) encompasses U.S. companies engaged in aerospace and defense sub-themes via the Indxx US Aerospace & Defense Index. Fee: 64 basis points.

Themes Transatlantic Defense ETF (NATO) identifies aerospace and defense companies headquartered in NATO member nations through the Solactive Transatlantic Aerospace and Defense Index. This fund charges 35 basis points, making it cost-efficient for investors seeking NATO-aligned defense exposure.

U.S. Global Technology and Aerospace & Defense ETF (WAR) provides globally diversified access to the defense ecosystem, including aerospace and defense companies, semiconductors, cybersecurity, data centers, and homeland security providers worldwide. Fee: 60 basis points.

Making Sense of Defense Sector ETF Selection

When evaluating defense sector etfs, investors should consider geographic exposure (U.S., European, or global), fee structures ranging from 35 to 64 basis points, and the specific sub-segments emphasized—whether pure aerospace and defense or broader defense technology ecosystems. The current environment of elevated geopolitical risk and government spending commitments supports structural demand for these investment vehicles, though individual fund selection should align with portfolio objectives and risk tolerance.