Geopolitical Tensions Fuel Surge in Defense ETFs

Key Defense ETFs Gaining Attention

Two popular choices in the sector have been the Invesco Aerospace & Defense ETF (

) and the Global X Defense Tech ETF (

SHLD

-0.21%

), which have attracted nearly $1 billion and $500 million in net inflows, respectively, this year. Both funds have delivered strong performance, with PPA up 27% and SHLD gaining 37%.

See all US-listed defense ETFs performances and flows here

Escalating Conflict in the Middle East

Recent developments have further intensified the situation. Israeli ground forces have entered Lebanon to counter Hezbollah, with airstrikes targeting various areas, including Beirut. Iran has retaliated with missile strikes following the assassinations of key figures, including Hamas leader Ismail Haniyeh, Hezbollah's Hassan Nasrallah, and an Iranian general. Israel is expected to respond to Iran's actions, potentially targeting sensitive sites within Iranian territory.

Increased Defense Spending to Bolster Defense Stocks Appeal

These events are driving expectations of increased defense spending as nations bolster their military capabilities. Investors are gravitating towards defense stocks for several reasons:

For example, the U.S. has provided substantial military aid to Israel, approving $17.9 billion in security assistance since October 2023. This includes $3.5 billion for wartime procurement and $5.2 billion for air defense systems, underscoring the strong U.S.-Israel strategic partnership.

Retrieved from Watson Institute for International and Public Affairs

On the Ukraine-Russia front, the U.S. Congress has passed five bills since the Russian invasion (February 2022) to provide ongoing support to Ukraine, with the latest passed in April 2024. These bills authorize a total of $175 billion in aid, a figure often highlighted by the media. This substantial funding is benefiting a wide range of Ukrainian people and institutions, including refugees, law enforcement, and independent radio stations, though the majority of the aid is focused on military support. In addition to the U.S., dozens of other countries, including most NATO and EU members, are also contributing significant aid packages to Ukraine.

Source: Congressional Budget Office

In response, Russia has recently announced a 25% increase in its defense budget, reaching a record 13.5tn rubles ($140 bn) in 2025. This move reflects Putin's commitment to continuing the war in Ukraine and countering Ukraine’s increased armament.

ETF Issuers Flock to Capitalize on Growing Demand

In response to growing interest, new defense ETFs are being filed. U.S. Global has proposed an ETF focusing on defense, aerospace, and cybersecurity firms, while Pacer ETFs has filed for an ETF tracking emerging defense technologies in U.S. companies. These developments highlight the increasing prominence of the defense sector in the current geopolitical climate.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.