Capture Rolls-Royce's Record '26 Rally Through These Diversified ETFs

Rolls-Royce RYCEY has started 2026 with strong momentum, up nearly 12.9% year to date and reaching new record highs in each trading session so far (as reported by CNBC).  For investors watching the uptick, this kind of price momentum might tempt them to buy this British Engineering titan right away, before it climbs further. 

However, buying a stock while it’s in a parabolic move can be risky. Instead, a smarter strategy is to gain exposure through exchange-traded funds (ETFs) that hold Rolls-Royce, allowing investors to participate in the stock’s rally while reducing the concentrated risk of a potential correction.

Now, before suggesting a few ETFs that you may add to your portfolio, let us delve a little bit deeper into what has been boosting RYCEY lately and why exactly we are advocating for ETF investment instead of the stock itself.

What Is Driving Rolls-Royce Lately?

The meteoric rise of Rolls-Royce in 2026 is fueled by a "perfect storm" of operational recovery and geopolitical tailwinds. Year to date (YTD), the stock has surged as high as 12.9%, dramatically outperforming the broader market; for comparison, the S&P 500 has managed only a 2% gain in the same period.

This outperformance is fueled by a powerful combination of operational tailwinds and external catalysts. The company has executed a significant turnaround, creating a leaner, more focused business with a stronger balance sheet and a young, growing fleet of engines requiring long-term service. 

While Rolls-Royce’s well-established civil aerospace segment — its largest business by revenues, supplying jet engines to commercial aircraft leaders, such as Boeing BA and Airbus EADSY — remains a long-term growth catalyst, recent momentum in the company’s defense business has also been fueling overall growth. As an example, it is imperative to mention that in mid-December 2025, Rolls-Royce began testing for its AE 1107 engine to support the prototype delivery for the U.S. Army MV-75 Future Long Range Assault Aircraft (FLRAA) program. 

Meanwhile, in early December, the company signed a strategic collaboration partnership worth £400 million to the UK Royal Navy’s submarines program and the wider Defence Nuclear Enterprise.

On the other hand, Rolls-Royce's robust balance sheet is underscored by the successful completion of its £1 billion share buyback program in late 2025, immediately followed by the launch of a £200 million interim, non-discretionary repurchase program in January 2026.

Externally, escalating geopolitical tensions, including the recent events involving Venezuela and Iran, along with renewed focus on Western defense spending, have boosted sentiment toward European defense and aerospace giants like RYCEY.

Why Buying RYCEY Right Now Isn't Recommended

While Rolls-Royce’s business performance is stellar, the stock’s valuation has entered "overheated" territory. Most investors seek stocks trading at or below their "fair value," but the current fair value estimate for RYCEY suggests the stock is significantly overvalued. Evidently, RYCEY is currently trading at a forward 12-month Price/Earnings (P/E) of roughly 39.3x, reflecting quite a high premium for an industrial firm as well as that of the broader market, which is trading at 23.46x.

Moreover, RYCEY’s Price-to-Earnings-to-Growth (PEG) ratio, now sitting around 2.8, suggests that the stock is overvalued, meaning its current price is high relative to its expected future earnings growth. So, owning this stock now might expose investors to "valuation gravity" — the risk of a sharp pullback if earnings growth doesn't perfectly match these high expectations.

ETFs to Buy

Considering the discussion above, rather than buying Rolls-Royce outright, investors can access its profitability through the following diversified ETFs, which offer significant exposure to the stock while also holding other industry leaders as part of a broader global portfolio.

Themes Transatlantic Defense ETF NATO

This fund, with a net asset value of $41.71, offers exposure to 79 aerospace and defense companies headquartered in North Atlantic Treaty Organization member countries. Of these, RYCEY holds the fifth position, with 6.21% weightage in the fund. Its top three holdings include renowned defense contractors — RTX Corp. RTX (8.46%), GE Aerospace GE (8.04%) and BA (7.46%). 

NATO has rallied 64.8% over the past year. The fund charges 35 basis points (bps) as charges. 

Select STOXX Europe Aerospace & Defense ETF EUAD

This fund, with net assets worth $1.20 billion, offers exposure to 13 companies headquartered in Europe who derive at least 50% of their revenues from the manufacture, service, supply and distribution of aeronautical equipment, components, hardware, software or electronic systems; and equipment, systems, components, infrastructure support services, and hardware, software and electronics that directly support civil and military defense efforts. Of these, RYCEY holds the second position, with 18.08% weightage in the fund. Its top three holdings include prominent aerospace and defense stocks: EADSY (18.36%) and Safran SAFRY (17.24%), other than RYCEY. 

EUAD has surged 94.9% over the past year. The fund charges 50 bps as charges. 

First Trust WCM International Equity ETF WCMI

This fund, with net assets worth $849.3 million, offers exposure to 48 non-U.S. domiciled companies to provide investors with long-term capital appreciation. Of these, RYCEY holds the first position, with 7.88% weightage in the fund. Its top three holdings include Taiwan Semiconductor TSM (6.32%) and Babcock International BCKIY (5.74%), other than RYCEY. 

WCMI has surged 39.5% over the past year. The fund charges 85 bps as charges. 

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

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