NATO Airspace Crisis Ignites Rally in Defense ETFs

In a dramatic turn in European security, Russian drones breached the Polish airspace on Sept. 9, 2025 — the first such intrusion to trigger a direct response from NATO member forces on its own soil. Polish officials counted 19 incursions, following which Polish F-16s and Dutch F-35s (as per Reuters) shot down the drones in a rapid show of force to avoid casualties.

Just a few days later, Romania faced a similar airspace violation, driving fears of a protracted and unpredictable conflict along NATO’s eastern edge. The immediate market impact was kind of inevitable with global investors flocking to defense equities, anticipating stronger military spending. It directly reinforced global demand for advanced military capabilities and allied defense preparedness, resulting in faster procurement of defensive arsenals.

As a result, major U.S.-listed defense exchange-traded funds (ETFs)— Global X Defense Tech ETF (SHLD), iShares U.S. Aerospace & Defense ETF (ITA), Select STOXX Europe Aerospace & Defense ETF (EUAD), SPDR S&P Aerospace & Defense ETF (XAR) and Invesco Aerospace & Defense ETF (PPA)—all outpaced the broader S&P 500’s gain of 1.2% since the incursions.

Why the Upside?

The reason behind the stark gain of the aforementioned defense ETFs is straightforward. These funds provide exposure to industry titans, especially suppliers of missile and fire-control products, such as Lockheed Martin, RTX Corp. and Northrop Grumman.

The aforementioned defense contractors have been the beneficiary of any kind of war escalation, historically, be it the Russia-Ukraine conflict, Iran-Israel, or Israel-Palestine over the Gaza Strip. These defense contractors typically secure increased government contracts during such crises, thereby driving gains for ETFs holding their shares.

And this recent surge in defense ETFs is not just driven by the sudden breach in NATO member nations’ airspace by Russia alone. The momentum leading to this gain has been building up since NATO pledged to raise defense spending in June 2025 from 2% of GDP to a solid 5%, a historic commitment with bipartisan support in the United States and across major European nations.

U.S.-based defense contractors in the aforementioned ETFs also have significant exposure to the European defense market. With increased defense spending pledges, investors are confident about steady revenues from long-term government contracts, which will eventually support the funds' performance.

Impressively, ITA, XAR, and PPA rallied almost 10% each, while EUAD rose 11% and SHLD surged 13%, from June-end following this year’s NATO summit.

Defense ETFs Rallying High

Against a backdrop of rising geopolitical risk and rapid military modernization by major nations worldwide, the following defense ETFs aren’t just riding a news cycle—they have become a core destination for investors who want both resilience and growth in an uncertain world.

Select STOXX Europe Aerospace & Defense ETF (EUAD): This fund has risen 7.3% since Sept. 9, when Russia invaded the Polish airspace. This is a solely Europe-based fund, which might have allowed it to beat the return of the other defense ETFs listed below, with European defense companies currently outperforming their U.S. counterparts at the bourses. The fund charges 50 bps in fees.

Global X Defense Tech ETF (SHLD): This fund has risen 6.3% since Sept. 9. SHLD logged substantial gains compared with U.S.-based defense ETFs, probably because of its considerable focus on Europe. Although the United States takes the top spot with about 57.9% exposure, Britain follows with 9.4%, and Germany with 8.8%. The fund charges 50 bps in fees.

SPDR S&P Aerospace & Defense ETF (XAR): This fund has rallied 3.7% since Sept. 9. It is mainly weighted on the United States. The fund charges 35 bps in fees.

iShares U.S. Aerospace & Defense ETF (ITA): This fund has gone up 2.8% since Sept. 9. It is also a U.S.-based fund. The fund charges 38 bps in fees.

Invesco Aerospace & Defense ETF (PPA): This fund has risen 2.3% since Sept. 9. PPA has 96.55% exposure to the United States, followed by Israel (2.38%) and Canada (1.07%). It charges 57 bps in fees.

With the defense industry at the center of current market narratives, EUAD, SHLD, ITA, XAR and PPA should prove attractive for investors seeking exposure to defense innovation and resilience, especially as the geopolitical landscape remains volatile.

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This article originally published on Zacks Investment Research (zacks.com).

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