U.S.-Taiwan Defense Sales and Geopolitical Risk Hedging: Strategic Investment Opportunities in the Indo-Pacific

The U.S.-Taiwan defense relationship has become a cornerstone of regional stability in the Indo-Pacific, with defense sales serving as both a strategic tool and a financial opportunity for aerospace and defense firms. As geopolitical tensions with China escalate, the U.S. has maintained a consistent but delayed flow of arms to Taiwan, creating both challenges and openings for investors. This analysis explores the evolving dynamics of U.S.-Taiwan defense sales, the financial stakes of key contractors, and how investors can hedge geopolitical risks through defense sector allocations.

The State of U.S. Defense Sales to Taiwan

As of early 2025, U.S. defense sales to Taiwan remain mired in a $21.54 billion backlog, with no new sales announced between January and February 2025. However, recent developments signal a shift toward smaller, more frequent sales. On November 13, 2025, the U.S. notified Congress of a $330 million sale for non-standard components and spare parts for F-16 and C-130 systems. This aligns with a broader trend of prioritizing regularized, incremental sales over large, one-time packages.

The Biden administration has approved $11.435 billion in arms sales to Taiwan since 2023, including advanced platforms like F-16 fighter jets, Abrams tanks, and Patriot missile systems. These sales are critical for Taiwan's self-defense but have faced significant delays. For instance, the F-16V Block 70 delivery timeline has been pushed to 2026–2027, with contractors working 20-hour shifts to accelerate production. Similarly, the M109A6 Paladin howitzer deliveries are now expected in 2026.

Key Defense Contractors and Financial Implications

The delays and scale of U.S.-Taiwan sales have directly impacted major defense contractors. Leidos, for example, secured a $987 million sustainment contract for Taiwan's F-16 fleet, ensuring operational readiness through 2034. The company also received a classified $1.3 billion Intelligence Community support contract and a $350 million subcontract for electronic warfare systems. Leidos' second-quarter 2025 revenue reached $4.25 billion, with Adjusted EBITDA of $647 million, reflecting robust demand for its services.

Northrop Grumman has benefited from its role in upgrading Taiwan's F-16V fleet with the AN/APG-83 SABR AESA radar. The company raised its 2025 guidance after reporting a 14% year-over-year sales increase in its defense systems division. Meanwhile, RTX Corporation (formerly Raytheon Technologies) secured a $700 million NASAMS air defense system sale to Taiwan, adding to its record $251 billion backlog and its $4.0 billion in third-quarter 2025 free cash flow.

Despite these gains, delays in deliveries have created budgetary uncertainties for Taiwan. The country has proposed a $40 billion supplementary defense budget to coordinate with U.S. arms sales.

Hedging Geopolitical Risks: Defense ETFs and Sector Opportunities

The Indo-Pacific's rearmament cycle has spurred demand for defense-focused investments. HANetf's Indo-Pacific Defence ETF (QUAD), launched in 2025, targets companies in India, Japan, South Korea, and Taiwan, addressing a gap in global defense portfolios that allocate only 3.55% to the region. This ETF capitalizes on structural trends: India's 75% domestic defense budget allocation, Japan's 2% GDP defense spending by 2027, and South Korea's 5% global arms market target.

Other ETFs, such as the Future of Defence UCITS ETF (NATO) and Global X Defense Tech ETF (SHLD), have seen strong performance, with SHLD returning 62% year-to-date. The PLUS Korea Defense Industry Index ETF (KDEF), launched in February 2025, surged 86% since inception, reflecting investor appetite for regional defense growth.

Academic research underscores the sector's resilience. A 2025 study found that innovation - particularly in AI and cybersecurity - had a greater impact on defense stock returns than geopolitical events. U.S. defense stocks served as a hedge during 2021–2022, while European defense firms showed higher sensitivity to both risks and innovation.

Strategic Outlook for Investors

The U.S.-Taiwan defense relationship is poised to remain a key driver of aerospace and defense sector growth. While delivery delays pose short-term challenges, the long-term trajectory of increased defense budgets and technological innovation offers compelling opportunities. Investors should consider a diversified approach:

1. Defense Contractors: Prioritize firms with direct exposure to U.S.-Taiwan sales, such as Leidos, Northrop Grumman, and RTX, which benefit from sustainment contracts and modernization programs.
2. Regional ETFs: Allocate to Indo-Pacific-focused defense ETFs like QUAD to capitalize on the region's rearmament cycle.
3. Gold and Diversified Portfolios: Balance defense sector exposure with traditional hedges like gold, though ETFs offer more targeted alignment with geopolitical trends.

As tensions in the Indo-Pacific persist, defense and aerospace sectors will remain critical for both national security and investor portfolios. The key lies in identifying companies and funds that align with the region's strategic priorities while mitigating delivery and budgetary uncertainties.