Defense-themed ETFs traded higher on Monday after strikes in Iran by the United States and Israel identified a new potential driver for the aerospace and defense space: replenishing missiles.
Over 100 Tomahawk missiles were reportedly used in the first phase of the operation. When the total inventory is around 4,000, this kind of usage rate indicates future replenishment orders that could keep contractors busy, says Tony Bancroft, portfolio manager for the Gabelli Commercial Aerospace and Defense ETF (NYSE:GCAD).
"It's notable that more than 100 Tomahawk missiles were reportedly launched on the first night alone. With roughly 4,000 in the U.S. arsenal, that level of usage underscores the likelihood of increased replenishment, production, and defense spending going forward. We're already seeing that reflected in the market, with defense stocks trading higher this morning," noted Bancroft.
Shares in major contractors were rising after the strikes.
The Spending Backdrop
The replenishment story sits atop an already massive fiscal base. "The U.S. defense budget is approximately $1.5 trillion — an extraordinarily large figure. Even a fraction of that amount would still exceed most current projections for fiscal year 2027,” says Bancroft.
However, the international market also adds to the overall picture. If NATO allies, excluding the U.S., were to meet a 3.5% of GDP procurement target, then the overall expenditure on defense would be around $400 billion annually, according to Bancroft.
“Importantly, our allies have materially increased their defense budgets over the past several years, and we expect that upward trend to continue," he says.
Most importantly for the U.S.-listed ETFs, much of the expenditure is going back into the coffers of U.S. companies.
"The United States remains the dominant force in global defense,” Bancroft said, citing the expansive industrial base of the country. Europe and other allied nations suffer from capacity constraints. As a result, the U.S. is expected to be the main driver of defense spending for the next few years at least.
Companies such as L3Harris Technologies Inc (NYSE:LHX) have already increased the international outlook for the next year.
ETF Exposure To The Arsenal Trade
Other sources of investment include broad-based funds such as the iShares U.S. Aerospace & Defense ETF (BATS:ITA) and the SPDR S&P Aerospace & Defense ETF (NYSE:XAR), which provide exposure to contractors who are well-positioned to take advantage of multi-year procurement cycles.
While short-term geopolitical premiums can reverse themselves quickly, replenishment contracts and structural budget increases tend to have much longer lead times.
For ETF investors, the question is whether this week’s rally represents a short-term response or the early stages of a deeper defense-spending cycle.
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