Space ETFs: Pioneering the Final Frontier for Long-Term Growth in Defense and Climate Tech

As the space economy accelerates toward a projected $1.8 trillion valuation by 2035, investors are increasingly turning to exchange-traded funds (ETFs) to capitalize on this transformative sector. The intersection of rising defense spending, climate technology innovation, and the commercialization of space has created a unique opportunity for strategic ETF selection. Space-themed ETFs, such as the ARK Space Exploration & Innovation ETF (ARKX) and the Procure Space ETF (UFO), are not only capturing the imagination of investors but also delivering robust returns amid a rapidly evolving landscape.

The Space Economy's Dual Drivers: Defense and Climate Tech

The space sector's growth is being propelled by two megatrends: the militarization of space and the integration of satellite technologies in climate resilience efforts. Defense budgets are surging globally, with the U.S. Department of Defense requesting a $849.8 billion fiscal 2025 budget, a significant portion of which is allocated to unmanned systems, hypersonic research, and satellite infrastructure. Meanwhile, climate tech is emerging as a critical area of investment, with the global market projected to grow from $37.5 billion in 2025 to $220 billion by 2035.

Space ETFs are uniquely positioned to benefit from these dynamics. For instance, the ARKX ETF, managed by ARK Invest, includes holdings like Kratos Defense & Security Solutions (KTOS) and Iridium Communications (IRDM), which provide satellite-based communication and defense solutions. Similarly, the Procure Space ETF (UFO) holds Rocket Lab and MDA Space Ltd., companies at the forefront of reusable rocket technology and satellite manufacturing. These ETFs combine exposure to high-growth space startups with established players in defense and climate applications.

Performance and Strategy: Why Space ETFs Stand Out

The performance of space ETFs underscores their appeal. As of Q2 2025, ARKX has returned 61.37% over the past 12 months, outpacing the S&P 500's 12.69% gain. UFO has similarly delivered 36.1% returns, driven by its 14% allocation to Rocket Lab and exposure to satellite communication providers like Echostar Corp (SATS). These returns are not accidental but a result of strategic focus on companies aligned with long-term secular trends.

Active management and concentrated portfolios are hallmarks of these ETFs. ARKX, for example, holds 35 stocks, with 27% of its assets in Rocket Lab, Kratos, and Iridium. This approach allows for deeper engagement with high-potential, innovation-driven firms, albeit with higher expense ratios (0.75% for both ARKX and UFO). However, the trade-off is justified by the sector's growth trajectory and the ETFs' ability to outperform broader markets.

Strategic Alignment with Defense and Climate Tech

The alignment of space ETFs with defense and climate tech is both strategic and structural. For defense, satellite-based systems are becoming indispensable for surveillance, communication, and missile defense. The U.S. “Golden Dome” missile defense initiative and NATO's push to increase defense spending to 5% of GDP highlight the sector's importance. ETFs like ARKX, with its exposure to Kratos (a leader in unmanned systems) and Iridium (satellite communication for defense), are well-positioned to benefit from this shift.

In climate tech, space ETFs are leveraging satellite data for environmental monitoring, disaster response, and resource management. Companies like Garmin (GRMN) and ViaSat (VSAT), included in space ETFs, provide GPS and broadband solutions that enable real-time climate data transmission. The integration of AI in climate modeling further amplifies the demand for geospatial data, a core strength of space-based infrastructure.

Long-Term Investment Thesis

For investors seeking long-term growth, space ETFs offer a compelling case. The global space economy's projected 7.3% CAGR through 2035, coupled with the defense sector's $2.4 trillion spending and climate tech's 24.6% CAGR, creates a fertile ground for sustained returns. While these ETFs are volatile, their thematic focus on innovation and infrastructure development provides a hedge against macroeconomic uncertainties.

Moreover, the convergence of defense and climate tech with space technologies is accelerating. For example, geothermal and nuclear energy projects—critical for meeting AI-driven electricity demand—are increasingly reliant on satellite-based logistics and monitoring. Space ETFs that include exposure to companies like Oceaneering International (OII) or Globalstar Inc. (GSS) are poised to capitalize on this synergy.

Final Thoughts

The space economy is no longer a speculative niche but a foundational pillar of the 21st-century economy. Space ETFs like ARKX and UFO provide a diversified, accessible way to participate in this growth while aligning with defense and climate tech megatrends. For investors with a long-term horizon, these funds offer exposure to a sector where technological innovation and geopolitical demand are set to collide.

As the final frontier becomes the next frontier of investment, strategic ETF selection will be key to navigating the volatility and unlocking the sector's full potential. Whether through defense-driven satellite infrastructure or climate-resilient monitoring systems, space ETFs are charting a course toward a trillion-dollar future.