Is 2026 the Year to Go Big on Defense ETFs?

The U.S. military operations in Venezuela on Saturday added another layer of complexity to an already fragile global geopolitical landscape. With ongoing tensions in the Middle East and Asia’s major flashpoints, geopolitically driven volatility remains elevated. This backdrop supports structurally higher defense spending, boosting the outlook for defense companies.

The S&P 500 Aerospace & Defense Index has gained 53.52% over the past year and 7.91% from Jan. 2 to Jan. 5, highlighting strong momentum in the sector. The index has significantly outperformed the broader S&P 500, which has risen 16.15% over the past year and 0.83% from Jan. 2 to Jan. 5.

According to Reuters, recent U.S. military operations in Venezuela may accelerate defense spending globally, as Trump’s readiness to use military force reshapes geopolitical risk perceptions.

According to a CNBC article, the operation may mark a broader geopolitical shift, strengthening the rearmament theme in the long term. Per Fawaz Chaudhry, Fulcrum Asset Management CIO, as quoted on the abovementioned CNBC article, increased rearmament in Europe and Asia, driven by a more assertive U.S. foreign policy, should keep defense spending and defense stocks on an upward trajectory.

Shares of major U.S. defense companies like Northrop Grumman NOC, Lockheed Martin LMT and RTX Corporation RTX moved higher on Monday, gaining about 4.4%, 3.0%, and 0.6%, respectively, following the military operation.

According to Global X, improving fundamentals, driven by higher defense budgets, stronger order pipelines and modernization programs, are reinforcing the long-term outlook for defense companies. Global defense spending is projected to top $3.6 trillion by 2030, marking around 33% rise from the levels seen in 2024. Additionally, despite easing conflict headlines, geopolitical priorities in the United States, Europe and Asia continue to underpin defense spending.

ETFs to Explore

In such an environment, investing in Aerospace and Defense ETFs may offer a strategic advantage, as these funds tend to perform well during periods of heightened military activity and increased defense spending.

Investors can consider iShares U.S. Aerospace & Defense ETF ITA, Invesco Aerospace & Defense ETF PPA, Global X Defense Tech ETF SHLD, State Street SPDR S&P Aerospace & Defense ETF XAR, First Trust Indxx Aerospace & Defense ETF MISL and Themes Transatlantic Defense ETF NATO.

With a one-month average trading volume of about 1.99 million shares, MISL is the most liquid option, ideal for active trading strategies. However, investors should approach the space with a long-term investment horizon.

ITA has also gathered an asset base of $13.26 billion, with the largest asset base among the other options. Regarding charging annual fees, XAR and NATO are the cheapest options, charging 0.35%, suitable for long-term investing.

Europe Opens the Purse Strings on Defense

The STOXX Europe Total Market Aerospace & Defense Index has reversed course since early December after trending lower from October. The rally signals renewed investor confidence in European defense stocks, reversing recent weakness tied to hopes of a potential Ukraine-Russia peace deal.

Investors seeking increased exposure to European defense companies may consider the Select STOXX Europe Aerospace & Defense ETF EUAD. 

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

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