ETFs to Consider Amid Geopolitical Woes and Higher US Military Budget

Recent U.S. military operations in Venezuela, Trump’s renewed focus on acquiring Greenland, even through military action, and persistent tensions across the Middle East and Asia’s key flashpoints highlight an increasingly fragile and complex geopolitical landscape. This backdrop structurally supports higher defense spending, a shift President Trump recently proposed.

As quoted on Reuters, President Trump recently proposed a substantially larger U.S. military budget, calling for a $1.5 trillion U.S. military budget in 2027, a sharp increase from the $901 billion approved for this year.

The proposal helped defense stocks rebound from earlier losses, which followed Trump’s criticism of defense firms for slow weapons production. The president had warned he could block American defense contractors from paying dividends or executing share buybacks until production accelerates. Shares of major U.S. defense companies like Northrop Grumman NOC, Lockheed Martin LMT and RTX Corporation RTX moved higher on Thursday, gaining about 2.39%, 4.34%, and 0.78%, respectively.

Rising Military Spending to Meet Budget Reality?

The proposal to increase the military budget, however, hinges on congressional authorization, potentially limiting its path forward. Additionally, the higher spending proposal has sparked renewed budget worries.

While a higher military budget has raised concerns about added pressure on U.S. debt, already about $38 trillion, as quoted on another Reuters article, Trump argued that the additional spending would be offset by tariff-generated revenues. He maintained that the United States could still reduce its debt burden while distributing dividend checks to moderate-income Americans.

A Structurally Strong Outlook for Defense Companies

The S&P 500 Aerospace & Defense Index has gained 59.87% over the past year and 11.59% in January so far, highlighting strong momentum in the sector. The index has significantly outperformed the broader S&P 500, which has risen 16.95% over the past year and 1.11% so far in the month.

According to Global X, global defense spending is projected to top $3.6 trillion by 2030, marking around 33% rise from the levels seen in 2024. Additionally, stronger fundamentals, supported by higher defense budgets, robust order pipelines and modernization efforts are strengthening the long-term outlook for defense companies.

ETFs to Explore

Aerospace and Defense ETFs

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 and Global X Defense Tech ETF SHLD. Investors can also increase exposure to European defense companies with the Select STOXX Europe Aerospace & Defense ETF EUAD.

Beyond Aerospace and Defense ETFs

Increasing geopolitical tensions and rising defense spending do more than strengthen core defense contractors; they also create spillover benefits across a range of auxiliary sectors. Below, we highlight a few funds that could potentially gain from this backdrop.

Cybersecurity ETFs

Escalating geopolitical crises have put cybersecurity in the spotlight amid the rise of cyberwarfare. The increasing instances of attacks by hackers underscore the need for more robust cybersecurity measures, especially given the growing reliance on digital infrastructure within defense systems and the shift of global conflict to a new digital front.

As warfare increasingly moves into the digital domain, investment in military-grade cybersecurity solutions has become strategically essential. Recent geopolitical conflicts, marked by a rise in cyberattacks, underscore this trend. Today, cybersecurity is emerging as a cornerstone of modern defense strategy, with the global military cybersecurity market poised for significant growth.

According to Fortune Business Insights,  the global defense cybersecurity market is forecasted to witness a CAGR of 16.1% from 2024 to 2032, reaching a valuation of $63.38 billion by 2032.

Investors can consider First Trust NASDAQ Cybersecurity ETF CIBR, Amplify Cybersecurity ETF HACK and Global X Cybersecurity ETF BUG.

Artificial Intelligence and Technology ETFs

AI is now central to military strategy, giving defense entities a strategic edge amid global tensions, enabling real-time processing of data from sensors and drones, supporting rapid decision-making, optimized logistics and precise threat detection.

As modern warfare shifts from hardware to information and speed, AI-driven defense companies are gaining traction, and higher military budgets are likely to create spillover benefits for AI-related firms.

Investors can consider iShares U.S. Technology ETF IYW, Fidelity MSCI Information Technology Index ETF FTEC, Global X Artificial Intelligence & Technology ETF AIQ and Global X Robotics & Artificial Intelligence ETF BOTZ.

Manufacturing ETFs

With Trump pushing defense companies to ramp up production, manufacturing ETFs could also stand to benefit. Investors can consider Industrial Select Sector SPDR Fund XLI and U.S. Manufacturing ETF MADE.

Space ETFs

Space is also becoming integral to defense operations. With modern warfare evolving and drone technology advancing, nations are increasingly investing in space-based systems to strengthen their military capabilities.

Military spending rise can also drive increased investment in the space economy, as the shift in warfare technology, including the militarization of space, takes momentum.

Investors can consider Procure Space ETF UFO, ARK Space & Defense Innovation ETF ARKX and SPDR S&P Kensho Final Frontiers ETF ROKT.

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

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