Time to Tap Aerospace & Defense ETFs?

Aerospace and defense ETFs have emerged as red-hot investments this year. Exchange-traded funds (ETFs) like iShares U.S. Aerospace & Defense ETF ITA, Invesco Aerospace & Defense ETF PPA, SPDR S&P Aerospace & Defense ETF XAR, Global X Defense Tech ETF SHLD and Select STOXX Europe Aerospace & Defense ETF EUAD have gained 23.5%, 18.5%, 15.8%, 57.3% and 66.5%, respectively, so far this year (as of June 17, 2025). These gains are in stark contrast to the 2.2% YTD gains seen in SPDR S&P 500 ETF Trust SPY.

Global Defense Spending at All-Time High

Amid escalating geopolitical tensions, global defense spending reached an all-time high of $2.72 trillion in 2024, according to the Stockholm International Peace Research Institute (SIPRI). This marks a 9.4% year-over-year increase — the sharpest annual rise since the Cold War era.

The top five spenders — the United States, China, Russia, Germany and India — accounted for 60% of the global defense budget, reflecting a high concentration of military outlays. U.S. military expenditure grew by 5.7%, reaching $997 billion and accounting for 37% of total global defense spending.

Note that global defense spending tends to remain resilient in the coming days — despite tariff-led economic downturns — due to ongoing geopolitical tensions, government commitments and national security priorities.

Let’s delve a little deeper.

Ongoing Hostilities Between Iran and Israel

Iran and Israel have continued exchanging fire for a sixth consecutive day, as tensions rise across the region. The sustained hostilities follow a high-level security meeting convened by U.S. President Donald Trump, intensifying speculation that Washington may soon take a more active role in the conflict.

On June 17, President Trump met with his national security team in Washington for over an hour to assess the escalating crisis. Following the meeting, Trump held a phone conversation with Israeli Prime Minister Benjamin Netanyahu, according to a White House official.

However, the United States has so far refrained from launching its own attacks. The administration maintains that U.S. involvement is currently limited to missile defense support for Israel. Trump demands "unconditional surrender" of Iran in terms of nuclear advancements.

Upbeat Earnings Prospects

Total S&P 500 earnings for the June quarter are expected to be up 5.2% from the same period last year on 3.8% higher revenues. Q2 earnings estimates for 14 of the 16 Zacks sectors have come down since the quarter got underway, with Aerospace and Utilities being the only sectors whose estimates have moved higher, as quoted on the Earnings Trends issued on June 11, 2025.

What Drove Higher Spending?

Amid growing security concerns, global defense spending has been rising since Russia's invasion of Ukraine. Following Russia's invasion, Europe significantly increased its purchases of military equipment from non-EU suppliers. All 32 NATO members increased their defense budgets in 2024, according to SIPRI, with 18 countries meeting or topping the bloc's 2% of GDP target. 

Military spending has also surged amid renewed U.S. pressure, with Trump urging NATO to hike defense outlays to 5% of GDP. He also warned of a possible U.S. troop withdrawal from Europe if the bloc fails to meet the higher targets.

Upbeat Sector and Industry Ranks

The Zacks Aerospace-Defense industry is housed within the broader Zacks Aerospace sector. It currently carries a Zacks Industry Rank #72, which places it in the top 29% of more than 250 Zacks industries. Meanwhile, the aerospace sector carries the best Zacks Sector Rank #1.

The Aerospace sector's debt-to-equity ratio of 0.25X indicates that it uses significantly less debt relative to equity compared to the S&P 500 average of 0.58X, reflecting a more conservative and lower-risk financial structure.

Valuation Looks Somewhat Overvalued?

The aerospace sector trades at a forward price-to-earnings (P/E) ratio of 27.18X versus the S&P 500’s forward P/E ratio of 19.23X. The Price/Earnings to Growth ratio (PEG) of the sector stands at 2.55X versus 2.41X offered by the S&P 500. This shows that the sector is now slightly overvalued, after the recent runup in share prices.

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

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