Defense ETFs to Rally as Geopolitical Tensions Show No Signs of Cooling

Year 2026 has been marked by persistent market volatility, with geopolitical tensions emerging as a key driver of uncertainty. Early in the year, U.S. military action in Venezuela and renewed ambitions around Greenland underscored the rising geopolitical strains shaping the global economic landscape.

This trend has only intensified with the ongoing conflict in the Middle East, which structurally supports higher defense spending and marks a broader geopolitical shift. As volatility led by geopolitical risks remains elevated, this backdrop reinforces the long-term rearmament theme and strengthens the outlook for defense companies.

The S&P 500 Aerospace & Defense Index has surged 66.78% over the past year and returned 13.51% so far this year, highlighting strong momentum in the sector. The index has significantly outperformed the broader S&P 500, which has risen 18.34% over the past year but has fallen 1.89% so far this year.

Geopolitical Storms Show No Signs of Easing

The Middle East conflict, now entering its third week, shows no signs of de-escalation and is already lasting longer than initially anticipated. At the same time, broader geopolitical tensions remain elevated, as recent remarks from President Trump about potential moves involving Cuba add to global uncertainty.

Rising conflicts have consistently fueled defense spending cycles. With instability likely to persist, growing demand for increased military strength strengthens the case for the defense sector as a compelling investment opportunity.

However, according to CNBC, Cuba confirmed last week that it was engaged in discussions with the Trump administration regarding a potential resolution.

Defense Spending Boom Reflects Shifting Global Priorities

Global defense spending rose 2.5% in real terms to $2.63 trillion in 2025 from $2.48 trillion in 2024, per the International Institute for Strategic Studies.

Rising global military spending is also likely to benefit U.S. defense contractors, with the United States accounting for roughly 42% of the global arms exports between 2021 and 2025, according to Statista.

U.S. Push to Rebuild Arsenal Boosts Defense Outlook

Per Reuters, the Trump administration’s push for defense contractors to accelerate production of missiles and other munitions reflects the urgent need to rebuild depleted stockpiles. These drawdowns stem largely from the ongoing conflict in the Middle East and continued support for Ukraine.

As a result, the push to rebuild inventories, alongside a more assertive foreign policy stance of the Trump administration, is likely to drive increased investment into the defense sector, making greater exposure to the space an attractive strategy.

ETFs to Explore

In such an environment, investing in 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 2.48 million shares, SHLD 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 $14.03 billion, with the largest asset base among the other options. Regarding charging annual fees, XAR and NATO are the cheapest options, both charging 0.35%, suitable for long-term investing.

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Global X Defense Tech ETF (SHLD): ETF Research Reports

iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports

Invesco Aerospace & Defense ETF (PPA): ETF Research Reports

State Street SPDR S&P Aerospace & Defense ETF (XAR): ETF Research Reports

First Trust Indxx Aerospace & Defense ETF (MISL): ETF Research Reports

Themes Transatlantic Defense ETF (NATO): ETF Research Reports

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

Zacks Investment Research